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2025 Fixed Income Outlook: A year of opportunity amid economic uncertainty?

Gene Tannuzzo
Gene Tannuzzo
Global Head of Fixed Income

With inflation cooling and the US Federal Reserve transitioning from rate hikes to a cycle of rate cuts, bonds are poised to perform well in 2025.

We believe success in the coming year will depend on how well portfolios are positioned to take advantage of lower rates while protecting against potential economic and credit volatility. In our view, the key theme in 2025 will be how investors successfully navigate greater dispersion across bond sectors.

Soft landing supports bond performance – but will it last?

So far, the Fed appears to have engineered a “soft landing”, with lower inflation accompanied by a gradual slowdown in growth. But it is important to remember that, historically, that’s how most hard landings begin. The challenge facing bond investors in 2025 will be whether the current economic deceleration continues smoothly or whether it evolves into a more severe downturn. The labour market will likely be a key factor. Should weakness in job creation persist, the economic outlook could deteriorate further.

We think inflation will continue to decline towards the Fed’s 2% target, and that the Fed will ultimately lower rates to below the neutral rate of 3% by the end of 2025. This expectation is based on our view that there is more softness ahead in the labour market and consumer demand.

However, two key factors could prompt the Fed to adjust its approach:

  1. Sticky or rebounding inflation If inflation reemerges – particularly in core services – the Fed may need to pause its cutting cycle and stabilise rates in the 3%-4% range.
  2. A significant demand shock A demand shock, especially coupled with labour market weakness, could cause the Fed to cut rates more aggressively, pushing them well below the neutral level, as seen in traditional rate-cutting cycles.

Regardless of which path unfolds, the Fed’s roadmap for 2025 remains flexible, with incremental rate cuts expected to reflect evolving economic conditions.

Opportunities in a rate-cutting environment

Given our base case, we believe the rate-cutting cycle should create a favorable environment for high-quality bonds in the US, particularly mortgage-backed securities and municipal bonds. These sectors, which are already starting from attractive yield levels, are well-positioned to deliver strong price returns as rates decline. We are taking a slightly more defensive stance on corporate credit, given the current level of risk premiums.

In the event of a harder landing, bond markets may experience increased volatility. High-quality and longer maturity fixed income securities are likely to benefit in such a scenario, as investors seek save haven assets during periods of economic stress.

Globally, as the Fed aligns with other central banks that have already begun easing monetary policy – the European Central Bank and the Bank of England among them – asynchronous opportunities in European and Asian credit markets may also arise. Diverging economic conditions across regions may create valuable entry points for global investors.

Navigating credit dispersion with active selection

As we assess valuations, it appears the market is not yet fully pricing in the potential for significant credit weakness across the globe. Therefore, we think a cautious approach to credit is warranted.

In addition, we expect credit dispersion will increase in 2025. While high-quality bonds are likely to perform well, certain industries are expected to experience elevated default rates – potentially in excess of 10% in certain sectors over the next two years, while others may remain closer to 1%. This divergence stems from the differing balance sheet health across industries, with highly leveraged companies – particularly in the high yield space – facing greater challenges. As economic volatility potentially rises, these weaker companies are more vulnerable to credit deterioration. This disparity creates an environment where active credit selection – our core strength at Columbia Threadneedle Investments – becomes essential for avoiding pitfalls and capturing the most attractive opportunities.

Bottom line: bonds positioned for success in 2025

Fixed income investors are entering 2025 with a strong foundation. With yields at attractive levels and the Fed in a supportive, rate-cutting cycle, bonds are well-positioned to generate healthy returns. Importantly, with the so-called “Fed put” – the belief that the Federal Reserve will intervene to support the economy during periods of stress – bonds are regaining their critical role as portfolio diversifiers. This implicit backstop should give investors confidence that even if economic conditions deteriorate, fixed income markets will remain supported.

Encouragingly, a significant macroeconomic shift is not required for bonds to perform well. Starting yields are currently above their 20-year average in most sectors. The tailwind from falling interest rates will only further boost total returns.

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2025 Fixed Income Outlook: A year of opportunity amid economic uncertainty?

Important information:

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is a marketing document. This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services.

 

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is a marketing document. This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services.

 

The NCREIF Property Index (NPI) is a quarterly, unleveraged composite total return for private commercial real estate properties held for investment purposes only.

 

Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. Real estate investing involves risks, including, without limitation: (i) actual operating results; (ii) interest rates; (iii) availability and costs of financing; (iv) economic and market conditions; (v) date of expected exit; (vi) increases in costs of materials or services beyond projections; (vii) force majeure events (e.g., terrorist attacks, extreme weather conditions, earthquakes, war); (viii) supply/demand imbalances; (ix) currency fluctuations; (x) litigation and disputes relating to investments with joint venture partners or third parties; (xi) changes in zoning and other laws; (xii) inability to obtain necessary licenses and permits; (xiii) competition; and (xiv) changes in tax law and tax treatment and disallowance of tax positions.

 

The value of directly-held property reflects the opinion of valuers and is reviewed periodically. These assets can also be illiquid and significant or persistent redemptions may requite the manager to sell properties at a lower market value adversely affecting the value of your investment.

 

The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be appropriate for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either.

 

Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This is a marketing document. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO)
No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other person should act upon it. This document and its contents and any other information or opinions subsequently supplied or given to you are strictly confidential and for the sole use of those attending the presentation. It may not be reproduced in any form or passed on to any third party without the express written permission of CTIME. By accepting delivery of this presentation, you agree that it is not to be copied or reproduced in whole or in part and that you will not disclose its contents to any other person.

 

Along with Columbia Threadneedle’s in-house Research and Lionstone Research, a variety of sources have been used in the production of this document including, but not exclusively, Oxford Economics, Property Market Analysis, MSCI (www.msci.com/notice-and-disclaimer), Moody’s, CoStar, Federal Reserve Bank of St. Louis.

 

In relation to data and information sourced from or provided by Property Market Analysis LLP, nothing herein expressed or implied is intended or shall be construed to confer upon or give to any person any rights or remedies under or by reason of this document. No third party is entitled to rely on any of the statements and/or information contained in this document, and no entity referred to herein assumes any liability to any third party because of any reliance on the statements and/or information contained in this document.
Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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Important information:

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is a marketing document. This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services.

 

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients). This is a marketing document. This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services.

 

The NCREIF Property Index (NPI) is a quarterly, unleveraged composite total return for private commercial real estate properties held for investment purposes only.

 

Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. Real estate investing involves risks, including, without limitation: (i) actual operating results; (ii) interest rates; (iii) availability and costs of financing; (iv) economic and market conditions; (v) date of expected exit; (vi) increases in costs of materials or services beyond projections; (vii) force majeure events (e.g., terrorist attacks, extreme weather conditions, earthquakes, war); (viii) supply/demand imbalances; (ix) currency fluctuations; (x) litigation and disputes relating to investments with joint venture partners or third parties; (xi) changes in zoning and other laws; (xii) inability to obtain necessary licenses and permits; (xiii) competition; and (xiv) changes in tax law and tax treatment and disallowance of tax positions.

 

The value of directly-held property reflects the opinion of valuers and is reviewed periodically. These assets can also be illiquid and significant or persistent redemptions may requite the manager to sell properties at a lower market value adversely affecting the value of your investment.

 

The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be appropriate for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either.

 

Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This is a marketing document. This document and its contents have not been reviewed by any regulatory authority.

 

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth) and relies on Class Order 03/1102 in respect of the financial services it provides to wholesale clients in Australia. This document should only be distributed in Australia to “wholesale clients” as defined in Section 761G of the Corporations Act. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

 

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

 

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited 天利投資管理香港有限公司. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

 

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO)
No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

 

In the UK: Issued by Threadneedle Asset Management Limited, No. 573204 and/or Columbia Threadneedle Management Limited, No. 517895, both registered in England and Wales and authorised and regulated in the UK by the Financial Conduct Authority.

 

In the EEA: Issued by Threadneedle Management Luxembourg S.A., registered with the Registre de Commerce et des Sociétés (Luxembourg), No. B 110242 and/or Columbia Threadneedle Netherlands B.V., regulated by the Dutch Authority for the Financial Markets (AFM), registered No. 08068841.

 

In Switzerland: Issued by Threadneedle Portfolio Services AG, an unregulated Swiss firm or Columbia Threadneedle Management (Swiss) GmbH, acting as representative office of Columbia Threadneedle Management Limited, authorised and regulated by the Swiss Financial Market Supervisory Authority (FINMA).

 

In the Middle East: This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge who meet the regulatory criteria to be classified as a Professional Client or Market Counterparty and no other person should act upon it. This document and its contents and any other information or opinions subsequently supplied or given to you are strictly confidential and for the sole use of those attending the presentation. It may not be reproduced in any form or passed on to any third party without the express written permission of CTIME. By accepting delivery of this presentation, you agree that it is not to be copied or reproduced in whole or in part and that you will not disclose its contents to any other person.

 

Along with Columbia Threadneedle’s in-house Research and Lionstone Research, a variety of sources have been used in the production of this document including, but not exclusively, Oxford Economics, Property Market Analysis, MSCI (www.msci.com/notice-and-disclaimer), Moody’s, CoStar, Federal Reserve Bank of St. Louis.

 

In relation to data and information sourced from or provided by Property Market Analysis LLP, nothing herein expressed or implied is intended or shall be construed to confer upon or give to any person any rights or remedies under or by reason of this document. No third party is entitled to rely on any of the statements and/or information contained in this document, and no entity referred to herein assumes any liability to any third party because of any reliance on the statements and/or information contained in this document.
Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

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