Targeting Bonds in Turbulent Markets
PGIM Fixed Income’s Greg Peters shares insights on the fixed income market and why he remains optimistic despite market uncertainties.
Fixed Income Offers Stability For Uncertain Conditions
Jun 16, 2025
PGIM Fixed Income’s Greg Peters explains why bonds stand out in times of slow growth and mounting risks.
Marked by slower growth and rising risks, the global backdrop is becoming increasingly complex. Unpredictable trade policy calls into question forward-looking assumptions in nearly every economic category, including trends in inflation and employment.
The uncertain conditions make a compelling case for investors to rely on fixed income characteristics proven to be a bit more predictable over time: stability and income.
UPDATED EXPECTATIONS
- Global economy: The global economy remains resilient so far, but cracks are forming. In the U.S., moderation remains our base case with expectations for below-trend GDP growth. Still, continued tariff uncertainty is increasing potential for recession or stagflation scenarios. In contrast, we expect more stability in Europe and Asia.
- Interest rates: While still patient at this juncture, the Federal Reserve may need to resume easing, with up to two rate cuts possible by year-end if tariffs hurt growth. We expect long-term rates to remain in a historically wide range, with the 10-year U.S. Treasury between 3.75% and 4.75%.
- U.S. dollar: The U.S. dollar is weakening due to rising deficits, debt costs, and tariff uncertainty, making unhedged local currency bonds more appealing.
SUPPORTIVE CREDIT FUNDAMENTALS
Despite volatility, credit spreads may stay rangebound. Slowing growth and rising anxiety could create a “good enough” environment, allowing modest credit outperformance over time. We remain positive on fixed income, both in absolute terms and relative to cash and equities, especially given notable downside risks.
ELEVATED YIELDS BOOST BOND APPEAL
Amid stock market gyrations, bonds are proving their worth as a stabilizing force, offering safety and steady returns. During the 2022-23 Fed tightening cycle, stocks and bonds had an unusually strong positive correlation, but this has returned to typical low levels. Amid recent market volatility, bonds outpaced stocks, reflecting a more normal dynamic. With high valuations despite the recent sell-off, equities could struggle if macro conditions worsen.
As the chart shows, when bond yields are between 4%-6% and equity valuations are high (price-to-earnings ratios over 23x), bonds show a historical propensity to outperform stocks over the next decade.
AVERAGE RETURNS IN DIFFERENT VALUATION AND YIELD REGIMES
Source: Bloomberg as 5/31/2025. Data shows average annualized 10-year returns after starting P/E levels shown for stocks and starting yield ranges shown for bonds. S&P 500 Index (stocks), Bloomberg U.S. Aggregate Bond Index (bonds). Past performance does not guarantee future results.
Gregory Peters
Co-Chief Investment Officer PGIM Fixed Income
OPPORTUNITIES ACROSS THE YIELD CURVE
BARBELL APPROACH
Given heightened interest rate uncertainty, investors may benefit from balancing short-term positions with long-term allocations for near-neutral duration exposure with a smoother return profile.
FOCUS ON QUALITY
High-quality bonds, like senior collateralised loan obligations and investment grade credit, are particularly attractive, serving as a steady income source while diversifying equity risk.
GO GLOBAL
Given significant U.S. policy uncertainty and a weakening dollar, investors may benefit from playing international yield curves with more stability and value.
Amid a moderating economic backdrop with rising downside risks, fixed income remains attractive for investors seeking long-term yields. Bonds offer potential for solid returns and portfolio stability while intermittent volatility creates opportunities for active management.
RELATED INSIGHTS
PGIM Fixed Income 2Q 2025 Outlook
In this 2Q 2025 outlook, PGIM Fixed Income shares its views on the current economic environment and outlook for fixed income markets.
Roadmap For Resilience
PGIM managers delve into key trends, offering valuable insights on navigating risks and unlocking potential in this challenging environment.
The views expressed herein are those of PGIM Fixed Income investment professionals at the time the comments were made and may not be reflective of their current opinions and are subject to change without notice. Neither the information contained herein nor any opinion expressed shall be construed to constitute an offer to sell or a solicitation to buy any security.
Certain information in this commentary has been obtained from sources believed to be reliable as of the date presented; however, we cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. The information contained herein is current as of the date of issuance (or such earlier date as referenced herein) and is subject to change without notice. The manager has no obligation to update any or all such information, nor do we make any express or implied warranties or representations as to the completeness or accuracy. Any projections or forecasts presented herein are subject to change without notice. Actual data will vary and may not be reflected here. Projections and forecasts are subject to high levels of uncertainty. Accordingly, any projections or forecasts should be viewed as merely representative of a broad range of possible outcomes. Projections or forecasts are estimated, based on assumptions, subject to significant revision, and may change materially as economic and market conditions change.
This material is being provided for informational or educational purposes only and does not take into account the investment objectives or financial situation of any client or prospective clients. The information is not intended as investment advice and is not a recommendation. Clients seeking information regarding their particular investment needs should contact their financial professional.
Prudential Investment Management Services LLC is a Prudential Financial company and FINRA member firm. PGIM Investments is a registered investment advisor and investment manager to PGIM registered investment companies. PGIM Fixed Income is a unit of PGIM, a registered investment advisor. All are Prudential Financial affiliates. © 2025 Prudential Financial, Inc. and its related entities. PGIM, PGIM Investments, PGIM Fixed Income and the PGIM logo are service marks of Prudential Financial, Inc. and its related entities, registered in many jurisdictions worldwide.
For compliance use only 4580126