Fixed income

The search for income

For Professional Investors Only.

Corporate bonds

Investment convictions

Outlook: Disinflation is progressing in Europe and the US. The ECB’s dovish stance points to further rate cuts, and we expect terminal rates to decline to 1.75% by July 2025. In the US, inflation is easing, but risks remain, and the Fed is likely to stay vigilant in addressing these. We expect terminal rates to settle at 3.5% by the middle of 2025.

Preferences: We prefer income opportunities, favouring investment-grade credit over high yield. Investment grade stands out for its strong fundamentals, low leverage, and attractive spreads aligned with historical averages.^[9]

Investment grade credit: Quality debt and income

As inflation decelerates towards long-term average levels, central banks are expected to adopt more accommodative monetary policies. This shift, coupled with low recession probabilities, should highlight bonds' income-generating function as yields would still be higher than historical averages.

Investment Grade (IG) credit stands out as a particularly appealing option due to its strong fundamentals, low leverage levels, and attractive spreads that remain in line with historical averages.^[9]

In the US, resilient corporate fundamentals and a stabilising economy support the outlook for IG credit, and the Federal Reserve’s anticipated policy normalisation further strengthens the case for quality debt.

Meanwhile, in Europe, IG credit has been buoyed by robust fundamentals and expectations of European Central Bank (ECB)
rate cuts, which historically have driven strong performance in corporate debt.^[3]

ETF implementation ideas

AMUNDI USD CORPORATE BOND UCITS ETF
Management fees: 0.07%

AMUNDI EUR CORPORATE BOND UCITS ETF
Management fees: 0.07%

Government bonds

Seeking diversification^[1] benefits and opportunities from yields

Investment convictions

Outlook: Government bonds are a core portfolio building block and, as inflation slows, will likely present attractive income opportunities.

Preferences: In an overall flexible approach, US Treasuries could offer positive performance in the final phase of the easing cycle. European sovereign debt could also offer attractive returns, while a green-tilt for Europe could add a responsible element to fixed income portfolios.

The low recession probability and non-restrictive fiscal policies suggest that government bonds will likely fulfil their income-generating function with relatively high yields.

US Treasuries

US Treasuries are likely to fulfil their role of providing good diversification^[1] and stability, and at the same time, offer reasonable yields for income generation purposes. However, despite high debt levels of the US government, investors are expected to keep faith with Treasuries - as long as the US economy keeps growing.

It’s important that investors focus on identifying the most attractive parts of the yield curve. At the start of 2025, we see the greatest value in the intermediate parts of the curve.

US inflation is declining but we see some risks from policies of the Trump administration, with the Fed likely to stay vigilant in addressing these.

So far, in the current cycle, Treasury yields
have behaved more or less in line with
historical averages.

The majority of FOMC participants see upside risks to inflation (core PCE) in 2025

Source: US Federal Reserve, Bloomberg. Data as at 18/12/2024.
There are 20 FOMC Participants (voting & non voting)

US inflation is declining but we see some risks from policies of the Trump administration

European government bonds

Despite lingering near-term volatility risks, the outlook for European sovereign debt is relatively positive. Supportive factors include ECB rate cuts, disinflation, liquidity, and the depth of the French and German bond markets. Europe’s sovereign bond market has, however, become increasingly exposed to private investors, which underscores the importance of governments maintaining their fiscal discipline and this is not going to be easy.

Investors could also consider fixed income instruments as a means to finance green projects, via green bonds in a Green-Tilted Index. These often deliver a similar duration to the parent indices on top of a greater exposure to green-project financing at similar yields.^[3]

ETF implementation ideas

AMUNDI US TREASURY BOND 3-7Y UCITS ETF
Management fees: 0.06%*

AMUNDI EURO GOVERNMENT BOND UCITS ETF
Management fees: 0.09%*

AMUNDI EURO GOVERNMENT TILTED GREEN BOND UCITS ETF
Management fees: 0.14%*

European governments must focus on debt discipline
Debt to GDP ratio - selected euro area countries (in %)

Source: Amundi, Eurostar, Bloomberg. Data as at 05/12/2024.
Past performance is not a reliable indicator of future performance.