Fixed-Income Outlook: Six Strategies to Thrive in Turbulent Times

As stocks dip, bonds are stepping up.

Since mid-January, a new political regime in Washington has shaken the geopolitical landscape and global markets. In this volatile environment, bonds have performed well, resuming their traditional role as ballast against falling stock prices and attracting strong demand from investors.

We believe that bond investors should stay the course. In our view, the trajectory for global growth and bond yields remains slower and lower, boosting bond prices. Below, we share our expectations for the world economy and global bond markets, as well as six strategies for thriving in a complex and rapidly changing investment environment.

Policy Volatility Itself Is a Headwind to Growth

In the US, trade, immigration, fiscal and regulatory policies have become fast-moving targets, and policy volatility is obscuring the path of the US economy. Consumer sentiment data has fallen to its lowest reading in three years, while longer-term inflation expectations have climbed to 3.9%—the highest since 1991. Any combination of weak growth or recession with high inflation would be challenging for the US Federal Reserve.

More clarity around growth and inflation is likely in the next month or two. For now, we expect US GDP growth to slow in 2025 but to remain positive, and we expect the Fed to ease another 0.5% to 0.75% this year as it steers toward a 3% policy rate.

By contrast, sentiment in Europe is moving in the other direction. In March, Germany surprised markets with a highly stimulative fiscal package focused on defense and infrastructure spending. The announcement sent German yields higher, and the one-day move in 10-year Bunds was the largest since the fall of the Berlin Wall.

The announcement has bolstered optimism for growth in Europe’s largest economic zone. While we still expect European growth to slow, we now expect the European Central Bank to lower its policy rate by only another 50 basis points this year, to 2%. 

Tensions, Tariffs and Trade Wars

As countries grapple with rapidly changing policy stances, there is one certainty that seems to have emerged: trade restrictions are likely to increase, with China as a primary target. In our view, raising trade drawbridges  will dampen global growth.

Over the near term, trade barriers typically slow economic growth by raising the price of imported goods, reducing consumer purchasing power and creating uncertainty that hinders business investment. Financial markets may also struggle, as slowing growth amid rising prices challenges central banks’ ability to support the economy.

Over the longer term, trade tensions heighten geopolitical risks. Previously stable diplomatic relationships, crucial for mutual economic interests, may weaken.

The consequences of rising tensions could be especially significant for China. China has strategically adjusted its export composition since 2018 to be less vulnerable to economic disruptions from trade wars. But that doesn’t make it immune. We expect further fiscal and monetary stimulus from Beijing to help offset this risk.

The critical question is what happens when trading partners feel compelled to choose between the US and China. Recently, we have seen Mexico and Korea indicate their intention to curb China’s backdoor entry for exports before entering trade negotiations with the US. If countries decide to deny all Chinese goods to align themselves with the US, that could significantly impede Chinese growth.

However, we see choosing sides as a double-edged sword. Countries that have benefited from acting as intermediaries in the rerouting of Chinese goods would likely also suffer.

To us, these conditions suggest a less harmonized global regime, in which economic cycles vary more significantly across regions, and a less efficient world economy, with more inflation relative to growth. Companies may need to navigate fractious trading relationships, brittle supply chains, volatile inflation and growth conditions, and potentially divergent monetary policy paths.

But ultimately, we see some room for optimism. Technological innovation and a resilient private sector may offset some damage, and policymakers may decide to change course as the effects of trade wars are felt. Eventually, we expect the world economy to reach a new equilibrium.

Six Strategies for Staying on Your Toes

Be Nimble, Be Active to Seize Opportunities

As we see it, investors should get comfortable with evolving policy expectations and near-term turbulence, while positioning portfolios to take advantage of opportunities created by heightened volatility and market tailwinds in the coming months.

Above all, keep an eye on broader trends, such as slowing economic growth, attractive starting yields and pent-up demand. This is a favorable environment for bond investors. We believe today’s conditions may prove fruitful for bond investors poised to take advantage.