Bond markets are unpredictable. Gilts and treasuries (to name just two) have dropped in recent weeks as fixed-income investors reacted poorly to several macroeconomic factors around the world.
Greg Peters, co-chief investment officer of PGIM Fixed Income, said: “As economies and policies diverge, dislocations are likely to lead to sector dispersion. This will benefit some countries, industries and issuers, while hurting others.
“Paradigm shifts in trade, technology and/or policy would further amplify dispersion and reward tactical allocation.”
Below, Trustnet asks experts about the landscape in different parts of the world and how they are investing during this volatile times.
The UK
Starting with the domestic market, uncertainty around November’s Budget and how the government will fix its ‘black hole’ in the country’s finances has caused consternation, with 30-year gilt yields rising over the past few weeks.
David Coombs, multi-asset fund manager at Rathbones, said he is “a buyer of gilts at these levels”, but said he was doing so without any “massive enthusiasm”.
“As long as inflation hovers around 3% you are getting a reasonable real return from those gilts, so on weakness we would be adding tentatively to gilts.”
However, he was less sure on corporate bonds, which he said are at “unbelievably narrow spreads”. As such, he has taken his weighting to “pretty much zero”.
The US
Although interest rates are expected to fall (typically a good thing for treasuries), fears over the future independence of the Federal Reserve, the impact of president Donald Trump’s tariffs and a weaker dollar have all contributed to market volatility.
Vincent Chung, co-portfolio manager of the T. Rowe Price Diversified Income Bond strategy, said risk assets are popular thanks to supportive fiscal stimulus, central bank easing and solid corporate earnings.
However, there is the potential for inflation to remain sticky, as he expects the Federal Reserve to allow the economy to “run hot” by cutting rates. As such, he has trimmed duration towards the lower end of his fund’s historic range.
“Furthermore, the OBBBA [One Big Beautiful Bill Act] is projected to add $4trn to national debt over the next decade, raising questions about fiscal sustainability,” he said.
“Combined with the administration’s political pressure on policymakers, these risks are driving a sell-off in long-end duration and we prefer curve steepeners as a result.”
Christian Hoffmann, head of fixed income at Thornburg Investment Management, said there was “considerable risk” in the current assumptions that the Federal Reserve will cut rates as aggressively as currently priced in.
The current five or six cuts by the end of 2026 expected by markets implies a “smooth landing” where inflation is under control and the economy remains stable, but higher inflation could lead to fewer cuts, while weaker-than-expected economic data could cause the Fed to up the pace.
Then there is the “potential interference at the Fed” by president Trump, who has attempted to fire one member and has repeatedly criticised chair Jerome Powell. He described it as “truly unprecedented” and something that investors should not be “too sanguine” about.
In all, he said investors should take “some credit risk and some duration risk”, but he would not lean too heavily into either area. He was active in March, buying up high-yield bonds when spreads widened to 450 basis points, but has been quiet throughout the summer.
Peters he is using a barbell approach of AAA-rated structured credit alongside shorter-duration high-yield bonds, which he described as “core allocations”.
“While corporate credit spreads remain tight, government bonds appear to reflect much of the market’s risk premium. In this environment, we see value in rate exposure, particularly given the asymmetric return potential and the opportunity to add duration at attractive levels,” he said.
While not overweight investment grade, there is an opportunity among the high-quality, short-term bonds, such as those issued by banks. On the high-yield side, however, he said the current universe is “less levered and shorter in duration with better credit visibility”.
Emerging markets, Asia and Europe
Away from the US, political issues seen in countries such as France and the ongoing war in Ukraine have impacted some European bonds, while Japanese bonds are under pressure after prime minister Shigeru Ishiba resigned this week.
On the latter, Chung noted that inflationary pressures remain above the central bank target range and real rates are still negative.
“This has led to a reduction in long-end duration exposure, as we anticipate eventual policy normalisation,” he said.
There could be alternatives elsewhere, he noted, particularly in the emerging markets (EM), where a weaker dollar is providing opportunities for EM central banks to cut interest rates.
“We are seeing selective opportunities within this space as a result. Local rates within Colombia and Brazil look particularly appealing, with elections possible in both countries next year, which could produce a more positive political outlook,” he said.
Coombs is also looking further afield, to places such as Portugal, Romania, New Zealand and Australia. He is also now doing his due diligence in Scandinavian and Asian countries as well.
“The reason it is a good opportunity to do that is because in many of those countries, when you hedge it back to sterling, you get paid. For example, our Romanian bonds are in euros, so you are getting 2% to hedge, so get a 6% yield and 2% hedge, so 8% on a short(ish) dated bond in Europe,” he said.
“There are pockets, but they are quite illiquid markets, so you have to be careful, because the markets are not as deep.”