Global growth and bond yields remain on a slower, lower path, creating a favorable backdrop for bonds. Yet risks beneath the surface demand vigilance. In a season of shifting conditions, we share our outlook and six strategies to help investors harvest opportunities while preparing for challenges ahead.
Tail Risks Recede, Headwinds Persist
The macroeconomic environment remains uncertain, but the tail risks around our central scenario for the next few quarters have diminished. With the tariff regime largely settled, we expect business sentiment to improve as uncertainty subsides. Still, tariffs have real consequences. Growth has already slowed across much of the developed world, and we expect the drag to continue as businesses face higher input costs and consumers adjust to higher prices.
In the US, the impact of tariffs has taken longer than expected to appear, as corporations frontloaded overseas purchases ahead of the policy changes. With inventories now largely depleted, the effect is clearer. Hiring has slowed sharply as companies brace for a higher-cost structure. Migration and deportation policies have reduced labor supply, adding to the slowdown in hiring already underway.
If slower hiring were to tip into layoffs, today’s modest growth slowdown could spiral. But that isn’t our base case. We expect US businesses to slog through a few quarters of sluggish demand without meaningfully cutting workforces, and consumers can likely withstand higher prices as long as employment holds steady.
We think the Federal Reserve, which eased to 4.0–4.25% in September, is likely to cut more quickly than markets expect, as the central bank steers policy toward neutral.
Europe tells a different story. The European Central Bank (ECB) recently kept rates unchanged at 2.0%, revised its outlook to slower growth (near 1% in 2026), and projected inflation to remain below target. Trade-policy uncertainty has eased, but the full impact of tariffs and a weaker global backdrop has yet to materialize. We expect the ECB to deliver another cut later this year, though most of the easing is likely behind us.
Elsewhere, policy easing is widespread. Emerging markets (EM) have lowered rates, helping moderate the global slowdown. In many EM countries, currency dynamics (including a softer US dollar) leave room for further cuts. A slow—but not recessionary—global economy should benefit EM economies, where yields remain higher than in most of the developed world.
China remains idiosyncratic. Deflation is still a risk, and policy steps so far have stabilized growth and prices but not revived them. We expect Beijing to remain cautious until there is more clarity on the path of US–China relations, making a near-term growth acceleration unlikely.
Longer-Term Fault Lines
Looking further ahead, we are increasingly concerned about structural fragilities in the system. Persistent trade tensions could harden into geopolitical rifts, and previously stable diplomatic relationships—crucial for mutual economic interests—may weaken.
Fiscal vulnerabilities are also mounting across the developed world. While investors voice concerns about rising deficits and the potential erosion of the safe-haven status of US Treasuries and the US dollar, we haven’t yet seen a meaningful increase in the term premium on long bonds. In fact, our analysis shows little relationship between debt levels and government bond yields across the globe.
That said, history is not destiny: if deficits continue to rise or confidence in central banks erodes, markets may eventually reprice these risks—whether gradually, or abruptly and disruptively.
To us, these conditions point to a less harmonized global regime, in which economic cycles vary more significantly across regions and the world economy operates less efficiently, 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.
A further risk is political encroachment on central banks, particularly in the US. When it comes to longer-term rates, the independence of the Fed remains critical: if markets begin to doubt it, we think the consequences for US Treasuries and global financial stability could be severe.
Markets seem content to ignore these risks for now, focusing instead on the near term—but in our view, the fuel for future crises is quietly accumulating.
Six Strategies to Put into Action
1. Actively manage duration.
Predicting the direction of bond yields over the near term is challenging. Our focus remains on the intermediate term, and we think that’s where investors should focus too. Historically, yields have declined as central banks have eased. Thus, in our view, bonds are likely to enjoy a price boost as yields trend lower in most regions over the coming two to three years.
Demand for bonds could remain exceptionally strong, in our analysis, given how much money remains on the sidelines. As of September 24, $7.3 trillion was sitting in US money-market funds. We anticipate roughly $2.5 to $3 trillion will return to the bond market over the next few years.
We expect bonds, having recently resumed their traditional role as anchor to windward, to retain that role. Duration—bonds’ price sensitivity to changes in interest rates—will likely remain negatively correlated to equities, in our view, and we believe duration should be part of an overall asset allocation.
If your portfolio’s duration has veered toward the ultrashort side, consider lengthening it. Duration benefits portfolios by delivering bigger price gains when interest rates decline. But don’t just set your portfolio duration and forget it. When yields are higher (and bond prices lower), lengthen the duration; when yields are lower (and prices higher), trim your sails. And remember: even if rates do rise from current levels, high starting yields provide a cushion against price declines.
Where to take that duration? Government bonds, the purest source of duration, provide ample liquidity and help offset equity volatility. Some securitized assets can also provide a meaningful and diversified source of duration. Duration can be sourced from diverse regions, too.
2. Think global.
As monetary policies diverge, idiosyncratic opportunities increase globally, and the advantages provided by diversification across different interest-rate and business cycles become more powerful.
3. Focus on quality credit.
Throughout 2025’s turbulence, credit has shown more resilience than stocks. Spreads remain close to cyclical lows, reflecting the broader market risk appetite. That said, when formulating an outlook for the credit markets, we believe it’s more important to focus on yield levels than on spreads.
Yield has historically been a better predictor of return over the next three to five years—even in very challenging markets. And today, yields across credit-sensitive assets look compelling to us. High-yield bonds, for instance, now offer 6.6% on average.
Current conditions, however, demand careful security selection. Changing policies and regulations won’t affect industries and companies uniformly, nor will weak economic growth. For instance, energy and financials are likely to face lighter regulation, while import-reliant industries such as retail could struggle.
We think it makes sense to underweight cyclical industries, CCC-rated corporates—which account for the bulk of defaults—and lower-rated securitized debt, as these are most vulnerable in an economic slowdown. A mix of higher-yielding sectors across the rating spectrum—including corporates, emerging-market debt and securitized assets—provides further diversification.
4. Adopt a balanced stance.
We believe that both government bonds and credit sectors have a role to play in portfolios today. Among the most effective strategies are those that pair government bonds and other interest-rate-sensitive assets with growth-oriented credit assets in a single, dynamically managed portfolio.
This pairing takes advantage of the negative correlation between government bonds and growth assets and helps mitigate tail risks such as the return of extreme inflation or an economic collapse. Combining diversifying assets in a single portfolio makes it easier to manage the interplay of rate and credit risks and to readily tilt toward duration or credit according to changing market conditions.
5. Harness a systematic approach.
Today’s environment also increases potential alpha from security selection. Active systematic fixed-income approaches may help investors harvest these opportunities.
Systematic strategies rely on a range of predictive factors, such as momentum, that aren’t efficiently captured through traditional investing. What’s more, these strategies aren’t swayed by the headlines that drive investor emotion. Because systematic approaches depend on different performance drivers, we believe their returns complement traditional active strategies.
6. Protect against inflation.
We think investors should consider increasing their allocations to inflation strategies, given the risk of future surges in inflation, inflation’s corrosive effect and the relative affordability of explicit inflation protection.
Active Investors: Prepare to Harvest 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 episodes of heightened volatility. Keep liquidity high so you can add risk on your own terms, not the market’s.
Above all, keep an eye on broader trends: slowing economic growth, attractive starting yields and pent-up demand. Collectively, these describe a favorable environment for bond investors. In our view, today’s conditions may prove fruitful for bond investors poised to take advantage.
- Scott DiMaggio
- Head—Fixed Income