PGIM: Perspectives on the Bond Market in a Context of Geopolitical Uncertainty
19 SEPT, 2025
By Greg Peters, Co-Chief Investment Officer of PGIM Fixed Income
MACROECONOMICS AND INVESTMENT CONTEXT
Rising volatility and tight spreads. The environment remains characterized by broad market resilience and tight credit spreads amid persistent political uncertainty. While media attention has focused on risks, particularly central bank decisions and trade negotiations, actual economic activity has held up well. Both in the U.S. and globally, growth remains stable, and inflation appears to be moderating more than feared. We believe major developed economies will continue to advance gradually. Institutional investors have rebalanced their portfolios toward fixed income, attracted by appealing valuations and defensive characteristics.
The baseline macroeconomic scenario sees the U.S. “managing at least reasonably well”. Consequently, we expect moderate growth of 1.3% in 2025 and 1.4% in 2026, with PCE inflation around 2.5–3.0% through Q4 2026. While downside risks persist, including the possibility of a mild recession, we believe the risk of a collapse is limited. Stability persists among companies and consumers, with no signs of overspending. Debt is concentrated in the public sector, and the private sector does not appear overly leveraged.
Consumer resilience with late-cycle stress signals. U.S. consumers remain generally healthy, but signs of fatigue are emerging. Wage growth and quit rates are declining, and spending is shifting toward lower-priced goods. In some segments, credit card delinquencies are rising, highlighting the need for discipline in asset-backed lending. These are typical late-cycle behaviors that warrant close monitoring.
MARKET OUTLOOK
Fixed-income profits supported by high yields. Yields have risen to levels not seen in over a decade following the 2022 bear market, laying the foundation for solid fixed-income profits. Despite persistent uncertainty, the current bull market suggests that high yields will continue to contribute to attractive long-term returns. Moving into 2025, the environment favors an opportunistic, carry-oriented approach. Bonds remain relatively inexpensive, and volatility spikes have not triggered massive sell-offs, reinforcing the validity of income-focused strategies.
Potential disruptions from cyclical risk. Although we expect further central bank rate cuts to support moderate global growth, this path is vulnerable to additional market turbulence. Labor market signals are weak, and global competition is intensifying. Given historically tight credit spreads, even modest turbulence could cause disruptions within or across sectors. These disruptions could create opportunities for active managers to add value through tactical positioning and selective exposure.
Tariffs dampen growth and inflation expectations. Tariffs are slowing growth expectations in both the U.S. and Europe, while in the U.S. they are fueling inflation expectations. The dollar has weakened, caught between the conflicting forces of tariffs, growth, and rates, affecting the relative performance of U.S. assets. Productivity gains driven by AI may offer long-term disinflationary potential, but short-term dynamics remain challenging, policy-sensitive, and under fiscal stress due to rising debt service costs, which could pressure rates further.
INVESTMENT OPPORTUNITIES
Sector dispersion creates opportunities for active management. With economic and policy divergence, imbalances may lead to sector dispersion. This will benefit some countries, sectors, and issuers while hurting others. Active management is critical, as these conditions make it increasingly important to identify early signs of stress and opportunities in the global fixed-income landscape. Paradigm shifts in trade, technology, and/or policy further amplify dispersion and reward tactical allocation.
Fixed income remains attractive versus equities and cash. U.S. assets are underperforming: fixed income appears attractive, and equities appear expensive. Since 1985, every segment of the bond market has outperformed equities in terms of the Sharpe ratio. Meanwhile, cash yields, while still elevated, have already declined significantly over the past year. If money market rates fall further, reinvestment risk and the opportunity cost of holding cash could be substantial relative to a high-quality total return bond portfolio.
High rates offer compelling entry points. Ten-year Treasuries are well above 4%, reflecting an embedded premium determined by supply, fiscal dynamics, and credit concerns, which is historically unusual. While corporate credit spreads remain tight, Treasuries seem to reflect much of the market risk premium. In this context, we see value in rate exposure, particularly given the potential for asymmetric returns and the opportunity to add duration at attractive levels.
POSITIONING AND OUTLOOK
Carry-oriented positioning continues to outperform. We maintain a carry-oriented portfolio focused on high-quality products with shorter-duration spreads. The strategy of collecting coupons and buying on price dips has helped us outperform benchmarks. Despite volatility spikes, bonds have not experienced significant sell-offs, as investors continue rotating toward fixed income.
Safe roll and carry remain central. We continue to favor a barbell strategy that balances high-quality carry with opportunistic risk. AAA-rated structured credit and shorter-duration high-yield bonds remain core allocations, offering attractive risk-adjusted returns with lower volatility. In our total return and longer-duration strategies, we have reduced credit risk and added duration. The embedded premium in Treasuries offers a rare opportunity to extend duration with significant upside potential.
Multi-sector credit portfolios offer resilience. We are not broadly overweight on credit risk but continue to favor high-quality, intermediate-duration products such as investment-grade corporate debt issued by major commercial banks. On the high-yield side, the current universe is less leveraged, with shorter duration and better credit visibility. Multi-sector portfolios remain well-positioned to generate income, preserve capital, and manage volatility, particularly as political uncertainty and global dispersion continue to shape the investment landscape.
