Global fixed income outlook
28 AUG, 2025
In a rapidly shifting global fixed income market, investors are navigating complex dynamics shaped by macroeconomic forces, geopolitical uncertainty, and the accelerating trend of de-dollarisation. While headlines often paint a dramatic picture, deeper analysis reveals resilient opportunities across investment grade credit, high yield bonds, emerging markets, and structured assets. In this outlook, Federated Hermes' experts share insights on where value can be found and how strategic positioning can help investors manage volatility while capturing long-term growth potential.
By: Mitch Reznick, Head of Fixed Income – London and Global Head of Sustainable Fixed Income
The pace of the news cycle is something worth contemplating. The headlines are relentless and dramatic, only made worse by the US administration’s tendency to reverse course. Wall Street has coined the term ‘TACO’ (Trump Always Chickens Out) in response to this phenomenon. That’s why we try to look beyond the headlines when making strategic decisions. We focus on the forces (macro, fundamentals, rates, sentiment, technicals) that drive the fixed income markets. These are our conclusions:
- Despite some worrying signals from the global economy and corporate fundamentals, we believe the worst-case scenarios have become low-probability events.
- While we have maintained our preference for Europe over the US in credit, we may be underestimating the power of the ‘de-dollarisation trade’, which has benefited emerging market credit.
- Since April, asset-backed securities (ABS) have provided high-quality protection against volatility, and we remain positive on this asset class.
- The collateralised loan obligations (CLO) market remains open and robust and, despite the tightening of spreads, we still see value in investing in higher-quality instruments.
- We continue to favour European banks and certain types of subordinated debt based on the sector’s strong capitalisation ratios.
- Global high yield spreads are not as high as they appear, given the notable decline in duration and the improvement in credit quality over time. In fact, with a three-year duration, we believe high yield credit is an excellent low-duration trade in a market where rate volatility is high.
Investment grade credit, an attractive asset class
By: Nachu Chockalingam, Head of Credit, London
Investment Grade credit
Elevated total yields are driving strong and sustained investor demand, marking investment grade credit as an attractive asset class at present. Demand has consistently outpaced supply, leading to reduced concessions in new issuance as deals are heavily oversubscribed. In this environment, the technical backdrop remains favourable and valuations are compressing. We maintain a preference for defensive, non-cyclical sectors such as healthcare, as well as a higher-quality approach favouring A-rated paper over BBB-rated counterparts. We prefer euro-denominated debt.
Emerging Markets: The momentum of de-dollarisation
Emerging market credit has shown impressive resilience over the past six months, supported by a favourable macroeconomic backdrop and structural tailwinds. Our initial view that tariffs would significantly impact emerging economies has not yet materialised. The current trend of de-dollarisation has boosted both hard currency and local currency emerging market fixed income assets, attracted greater investor interest, and reduced vulnerability to US rate volatility.
High Yield credit: strength and resilience
The high yield bond market has demonstrated remarkable resilience and strength during the first half of the year, rebounding from early-year volatility triggered by tariff uncertainty and geopolitical tensions. The market is experiencing a notable supply-demand imbalance due to the limited amount of issuance (most of it refinancing activity) and persistent investor demand. We therefore maintain a constructive view on this asset class. Despite the global trend of spread tightening, B-rated bonds have lagged behind recently and now appear attractive relative to BB-rated bonds.
Banking, strong technicals
By: Filippo Alloatti, Head of Financials
The favourable macroeconomic environment has continued to benefit the financial sector, reflected in strong Q2 earnings, with many large-cap institutions raising their outlooks for the 2025 fiscal year. The market continues to benefit from robust technicals, with nearly all subordinated debt being called at the first call date and new issuance well received by investors. From a relative value perspective, we continue to see better opportunities in the subordinated layers of the capital structure. Due to their lower sensitivity to rates, we believe instruments with higher back-end spreads have the potential to provide downside protection if we see further rate volatility. We have been seeking attractive opportunities to rotate more into this segment in recent weeks.
Structured credit
By: Andrew Lennox, Senior Portfolio Manager
Demand remains high while supply is falling well short of investor appetite, particularly in European asset-backed securities (ABS). European ABS issuance so far this year is slightly behind where we were at this point last year. In the case of CLOs, US issuance this year is in line with 2024, while in Europe we are significantly ahead compared with the same period last year. The number of open warehouses, which indicate forthcoming CLO supply, is well above the long-term average, suggesting substantial issuance ahead. Despite this outlook for supply, technicals remain firm for mezzanine tranches, as the depth of the investor base has grown in recent years.
