Fixed Income in Focus
PGIM Fixed Income Co-Chief Investment Officer Gregory Peters shares his fixed income outlook amidst a backdrop of tariff-induced volatility and shifting policy
Weekly View from the Desk
Apr 28, 2025
Assessing Global Tariff Scenarios, Sector Implications
Macro
- Our participation in the IMF Spring Meetings last week provided some additional insights into the evolving tariff situation. At this point, the U.S. administration appears set to prioritize trade negotiations, and while it may seek to highly publicize upcoming “agreements in principle,” the effective U.S. tariff rate is still expected to be meaningfully higher (say in the teens to 20% area) after beginning the year at 2.5%.
- With China being a tariff focal point, the prevalent baseline scenario is that the U.S.’s core policy objective is to decouple strategic sectors, such as advanced microchips, from China. From a broader trade perspective, one potential path to de-escalation could be to revert to the pre-WTO tariff structure of 45%+. It was also thought that a new trade agreement with China could evolve from a series of mini-agreements that build trust to a more comprehensive agreement over the course of two to three years. Interestingly, many global participants expressed hieghtened concerns about secondary tariff effects, such as the potential for diverted trade of low-cost goods into domestic markets.
- The KORUS-plus trade talks that built upon the KORUS trade agreement between Korea and the U.S. could serve as a template for global negotiations, which could include currency and capital flow provisions as well as those tied to China exclusion clauses regarding trade.
- The beginning of the third quarter, say July 4th, is materializing as a future milestone as effects of the tariff situation will become more apparent throughout the affected economies and the U.S. budget reconciliation process likely comes into view.
- Some broad, global market themes that surfaced during the meetings included: the extent of the safe-haven erosion of U.S. Treasuries and the dollar; whether the markets have seen the peak in U.S.-driven stress; and how Europe might capitalize on its opportunity amidst a lack of details thus far.
Developed Market Rates
- In the event that U.S. Treasuries lose some of their safe-haven luster, it’s possible that an elevated term premium could become more of a fixture across the Treasuries complex. For example, the relationship between the 10-year yield and the market-implied Fed funds trough (i.e., the lowest effective Fed funds rate), which historically indicated a spread of ~70 bps. However, that spread recently expanded to about 115 bps.
- While several global central banks may be in “wait and see” mode, that may mean additional policy easing in 2026, particularly in the U.S. Indeed, the U.S. is the only major economy expected to see meaningfully lower overnight rates next year.
- That said, synchronized selloffs in rates and equities remains relatively rare. Indeed, the synchorinzed selloff on April 8, while extreme by historical standards, was easily eclipsed by the volatility during the most recent Fed hiking cycle, the COVID pandemic, and the Financial Crisis, according to Citigroup.
- In MBS, steady buying emerged from the elevated levels seen in mid-April, and convexity accounts have been buying duration into the recent move lower in yields. The recent surge in primary mortgage rates has dampened origination, despite typical seasonals, to a daily average of only $2.8B. In terms of positioning, we prefer the 30-year sector given the widening there has been more pronounced. We’re also focusing on coupons at and just below par, adding GNMA exposure, especially in pool form, and a return to perferring pools vs. TBAs.
IG Corporates
- In the last two weeks, there has been a significant rebound in IG Corporate spreads following the walk back in tariff policy from President Trump. The IG corporate index started 2025 with an OAS of 80. After ending Q1 at 95, the Index reached a YTD wide of 120. Currently, the Index sits at 101, recapturing much of the widening that has occurred YTD. Meanwhile, market volatility (although still elevated) has continued to come down.
- We believe the market may not be providing enough compensation given possible growth outcomes. Given the economic scenarios laid out by our economists, we have derived a simplified two-scenario model in which there is a 50% chance of moderation, productivity boost, or economic boom vs. a 50% chance of recession or stagflation. Based on this model, we would expect spreads to be around 135 (absent any assumptions around carry, roll, or credit migration) vs. the current OAS (101). As a result, we are cautious when it comes to adding risk.
- There is significant divergence between front-end and back-end spreads. Long corporates (+10-year) are still in the 10th percentile, while the 1-5 year is in the 50th percentile. The yield on the back end continues to support demand, bolstered by lower issuance.
- Roughly 40% of companies in the S&P 500 have reported earnings. Estimates for the full year have been reduced from 14% to around 10%, in line with earnings reported thus far. We note that companies are cutting guidance due to the impact of tariffs. Furthermore, companies are seeking to cut costs or raise prices to offset this impact.
- EUR IG spreads ended last week 5 bps tighter. The Index is now just 6 bps wide of its YTD starting point, despite the disturbance in global markets driven mostly by U.S. foreign and trade policy. That stated, the amount of optimism currently priced into the market following the 90-day pause might be overstated. Given the holiday-shortened period, last week was relatively quiet in terms of issuance.
- Based on the technical of the EUR IG market, we are not tempted to change positioning in the portfolio and will continue to favor utilities and financials over industrials.
Leveraged Finance
- The HY market continued to whipsaw, with a firmer tone and a bias toward rallying, as calming trade and Fed leadership headlines eased investor concerns. A hitherto decent earnings season provides little guidance given the burst of broad macro volatility post-tariffs announcement and prevailing uncertainty. Technical support remains solid given light new issuance volumes and higher cash balances.
- Last week was HY's strongest weekly performance in over a year. Returns across all credit tiers and sectors were positive: CCCs outperformed Bs, and BBs; chemical, super retail, and media, outperformed, while paper, aerospace, and electric utilities were the weakest. Three new deals totaling $4.4B came to market. Outflows continued, with $1.53B flowing out of the asset class, bringing YTD net flows to negative $5B.
- Bank loans gained amid easing outflows, light trading volumes, and a renewal in primary market activity. Last week's $650M outflow was a stark slowdown from the $12.6B of outflows over the past seven weeks. The primary market saw its first bout of activity since the tariffs announcement, with $2.4B across two deals pricing. At $4.4B, April is shaping up to be the lightest new issuance month since 2010.
- European HY bond and bank loan spreads tightened, retracing most of the widening from earlier in the month. While spreads tightened broadly, tariff sensitive issuers, such as those in autos and auto parts, tightened even beyond their pre-Liberation Day levels. That said, we remain cautious as earnings season begins to ramp up.
Emerging Markets
- EM sovereign spreads tightened last week amid a recovery in risk markets and hopes that some of the worst of the trade war announcements would continue to be walked back. While the takeaway from the IMF meetings was continued caution-especially as it pertains to the U.S. outlook-EM investors were more constructive around the EM outlook.
- While spreads are still wider YTD, they have now retraced almost 50% of the widening since the April 2 tariff announcements. The rebound in Ecuador continued last week, and the SSA region also saw a strong bounce, some of which was a function of relatively constructive comments from the IMF and some of which was a function of oil prices. We remain cautious about adding overall risk and instead are looking for idiosyncratic opportunities amid ongoing market dispersion.
- EMFX gained last week as USD weakness continued. LatAm outperformed, with BRL, MXN, and COP among the largest outperformers. CLP and PEN were also quite strong on the back of higher copper prices. Despite market volatility, we are gaining conviction that USD is likely to continue its weakening trend.
- EM local rate yields declined last week, with Brazil, Colombia, South Africa, and Hungary leading the rally. The curves in all four countries bull flattened and the asset swaps tightened. Indonesia, Turkey, and Mexico also rallied. In EM corporates, spreads were tighter, with IG paper better bid and some HY names also tightening as supply remained relatively low. Metals and real estate names performed well.
Securitized Products
- CMBS conduit spreads tightened, with secondaries easing to 100 and subordinate tranches tightening as much as 30 bps on strong new-issue pricing. SASBs AAAs tightened 5 bps while subordinated tranches tightened as much as 10 bps. Two primary deals priced-one agency and one conduit. SASB pipeline remains pressured by near-term volatility, with spreads widening as much as 75 bps for deals to clear.
- In RMBS, spreads in non-QM AAAs through As, second-lien AAAs through As, and CRT's all tightened. Non-QM and second-lien AAAs are both trading as much as 15 bps tighter than new issues. New issuance picked up on improved pricing and higher demand. Of the seven primary deals totaling $2.3B, non-QM's $1.2B across three deals was largest share, followed by $800M from three second-lien transactions. Last week's primary activity brings YTD volume to $48B.
- U.S. CLO primary spreads remain supported by demand from dealers and Japanese investors. With secondary spreads moving tighter, we've renewed our focus on primary deals, notably benchmark issuers. European primary spreads widened for deals in the pipeline and we expect issuance to resume in the coming weeks. About $3.3B across seven deals in the U.S. came to market, including five new issues and two resets.
- ABS spreads tightened as broader market volatility stabilized. Senior tranches tightened as much as 10 bps, while mezzanine securities tightened as much as 35 bps. New issuance resumed with investors looking to take of widening earlier in the month. Primary deals were inclusive of auto, equipment, and consumer loan transactions, all of which priced at or inside of initial price guidance.
Municipal Bonds
- Munis are down -1.6%, while Treasuries are up ~5% YTD. This divergence is unusual as both normally move in the same direction. While fundamentals remain strong, the main concern is the knock-on effects of slower growth. That stated, munis are generally viewed as a late cycle "safe haven."
- On the valuation front, ratios remain attractive. In the past two weeks, M/T yield ratios on the 5-year, 10-year, and 30-year ratios declined -0.1%, -03%, and -0.3% to end last week at 81%, 81%, and 95% (respectively).
- This week's calendar is ~$16B (inclusive of postponed day-to-day deals). Helping to digest the heavier primary supply will be $20B in reinvestment capital that is expected in May. Meanwhile, issuance in the taxable muni bond space continues to be muted, with one index eligible primary deal expected this week.
- Despite federal government action against universities (including new accreditation executive orders), spreads have not reacted. Issuance from Harvard is the exception as it is currently ~10 bps wider.
Source(s) of data (unless otherwise noted): PGIM Fixed Income as of April 2025.
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U.S. Investment Grade Corporate Bonds: Bloomberg Barclays U.S. Corporate Bond Index: The Bloomberg Barclays U.S. Investment Grade Corporate Bond Index covers U.S.D-denominated, investment-grade, fixed-rate or step up, taxable securities sold by industrial, utility and financial issuers. It includes publicly issued U.S. corporate and foreign debentures and secured notes that meet specified maturity, liquidity, and quality requirements. Securities included in the index must have at least 1 year until final maturity and be rated investment-grade (Baa3/ BBB-/BBB-) or better using the middle rating of Moody’s, S&P, and Fitch.
European Investment Grade Corporate Bonds: Bloomberg Barclays European Corporate Bond Index (unhedged): The Bloomberg Barclays Euro-Aggregate: Corporates bond Index is a rules-based benchmark measuring investment grade, EUR denominated, fixed rate, and corporate only. Only bonds with a maturity of 1 year and above are eligible.
U.S. High Yield Bonds: ICE BofAML U.S. High Yield Index: The ICE BofAML U.S. High Yield Index covers US dollar denominated below investment grade corporate debt publicly issued in the US domestic market. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, and at least one year remaining term to final maturity as of the rebalancing date.
European High Yield Bonds: ICE BofAML European Currency High Yield Index: This data represents the ICE BofAML Euro High Yield Index value, which tracks the performance of Euro denominated below investment grade corporate debt publicly issued in the euro domestic or eurobond markets. Qualifying securities must have a below investment grade rating (based on an average of Moody's, S&P, and Fitch). Qualifying securities must have at least one year remaining term to maturity, a fixed coupon schedule, and a minimum amount outstanding of €100 M. ICE Data Indices, LLC, used with permission. ICE DATA INDICES, LLC IS LICENSING THE ICE DATA INDICES AND RELATED DATA "AS IS," MAKES NO WARRANTIES REGARDING SAME, DOES NOT GUARANTEE THE SUITABILITY, QUALITY, ACCURACY, TIMELINESS, AND/OR COMPLETENESS OF THE ICE DATA INDICES OR ANY DATA INCLUDED IN, RELATED TO, OR DERIVED THEREFROM, ASSUMES NO LIABILITY IN CONNECTION WITH THEIR USE, AND DOES NOT SPONSOR, ENDORSE, OR RECOMMEND PGIM FIXED INCOME OR ANY OF ITS PRODUCTS OR SERVICES.
U.S. Senior Secured Loans: The iBoxx USD Leveraged Loan index family represents the main sections of the USD leveraged loan market. Index constituents are derived using selection criteria such as loan type, minimum size, liquidity, credit ratings, initial spreads and minimum time to maturity.
European Senior Secured Loans: The index universe of the S&P UBS Western European Leveraged Loan Index is meant to represent assets or activity in Western Europe, and includes loans denominated in EUR, GBP, or USD.
Emerging Markets U.S.D Sovereign Debt: JP Morgan Emerging Markets Bond Index Global Diversified: The Emerging Markets Bond Index Global Diversified (EMBI Global) tracks total returns for U.S.D-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities: Brady bonds, loans, and Eurobonds. It limits the weights of those index countries with larger debt stocks by only including specified portions of these countries’ eligible current face amounts of debt outstanding. To be deemed an emerging market by the EMBI Global Diversified Index, a country must be rated Baa1/BBB+ or below by Moody’s/S&P rating agencies. Information has been obtained from sources believed to be reliable, but J.P. Morgan does not warrant its completeness or accuracy. The Index is used with permission. The Index may not be copied, used, or distributed without J.P. Morgan's prior written approval. Copyright 2021, J.P. Morgan Chase & Co. All rights reserved.
Emerging Markets Local Debt (unhedged): JPMorgan Government Bond Index-Emerging Markets Global Diversified Index: The Government Bond Index-Emerging Markets Global Diversified Index (GBI-EM Global) tracks total returns for local currency bonds issued by emerging market governments.
Emerging Markets Corporate Bonds: JP Morgan Corporate Emerging Markets Bond Index Broad Diversified: The CEMBI tracks total returns of U.S. dollar-denominated debt instruments issued by corporate entities in Emerging Markets countries.
Emerging Markets Currencies: JP Morgan Emerging Local Markets Index Plus: The JP Morgan Emerging Local Markets Index Plus (JPM ELMI+) tracks total returns for local currency–denominated money market instruments.
Municipal Bonds: Bloomberg Barclays Municipal Bond Indices: The index covers the U.S.D-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. The bonds must be fixed-rate or step ups, have a dated date after Dec. 13, 1990, and must be at least 1 year from their maturity date. Non-credit enhanced bonds (municipal debt without a guarantee) must be rated investment grade (Baa3/BBB-/BBB- or better) by the middle rating of Moody's, S&P, and Fitch.
U.S. Treasury Bonds: Bloomberg Barclays U.S. Treasury Bond Index: The Bloomberg Barclays U.S. Treasury Index measures U.S. dollar-denominated, fixed-rate, nominal debt issued by the U.S. Treasury. Treasury bills are excluded by the maturity constraint but are part of a separate Short Treasury Index.
Mortgage Backed Securities: Bloomberg Barclays U.S. MBS - Agency Fixed Rate Index: The Bloomberg Barclays U.S. Mortgage Backed Securities (MBS) Index tracks agency mortgage backed pass-through securities (both fixed-rate and hybrid ARM) guaranteed by Ginnie Mae (GNMA), Fannie Mae (FNMA), and Freddie Mac (FHLMC). The index is constructed by grouping individual TBA-deliverable MBS pools into aggregates or generics based on program, coupon and vintage.
Commercial Mortgage-Backed Securities: Bloomberg Barclays CMBS: ERISA Eligible Index: The index measures the performance of investment-grade commercial mortgage-backed securities, which are classes of securities that represent interests in pools of commercial mortgages. The index includes only CMBS that are Employee Retirement Income Security Act of 1974, which will deem ERISA eligible the certificates with the first priority of principal repayment, as long as certain conditions are met, including the requirement that the certificates be rated in one of the three highest rating categories by Fitch, Inc., Moody’s Investors Services or Standard & Poor’s.
Palmer Square AAA CLO DM Index represents the discount margin of CLO AAA rated tranches in the Palmer Square CLO Senior Index, which is designed to reflect the investable universe of U.S CLO senior original rated AAA and AA debt issued after Jan 1, 2011.
Global Aggregate Bond Index is a measure of global investment grade debt from twenty four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.
U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index: The Bloomberg Barclays U.S. Aggregate Index covers the U.S.D-denominated, investment-grade, fixed-rate or step up, taxable bond market of SEC-registered securities and includes bonds from the Treasury, Government-Related, Corporate, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS sectors. Securities included in the index must have at least 1 year until final maturity and be rated investment-grade (Baa3/ BBB-/BBB-) or better using the middle rating of Moody’s, S&P, and Fitch.
Euro Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, euro-denominated, fixed rate bond market, including treasuries, government-related, corporate and securitized issues. Inclusion is based on currency denomination of a bond and not country of risk of the issuer.
Japanese Aggregate Bond Index The Japanese Aggregate Index contains fixed-rate investment-grade securities denominated in Japanese yen and registered as domestic bonds. The index is composed primarily of local currency sovereign debt but also includes government-related, corporate, and securitized bonds.
The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over U.S.D 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately U.S.D 3.4 trillion of this total. The index includes 500 leading companies and captures approximately 80% coverage of available market capitalization.
The DAX Index is a total return index of 30 selected German blue chip stocks traded on the Frankfurt Stock Exchange. The equities use free float shares in the index calculation. The DAX has a base value of 1,000 as of December 31, 1987. As of June 18, 1999 only XETRA equity prices are used to calculate all DAX indices.
The STOXX 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 17 countries of the European region.
The Nikkei 225 Index is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange. The Nikkei Stock Average was first published on May 16, 1949.
Shanghai Composite Index is a capitalization-weighted index. The index tracks the daily price performance of all A-shares and B-shares listed on the Shanghai Stock Exchange. The index was developed on December 19, 1990.
MSCI ACWI is a free-float weighted equity index. It was developed with a base value of 100 as of December 31 1987. MXWD includes both emerging and developed world markets.
FTSE 100 is a capitalization-weighted index of the 100 most highly capitalized companies traded on the London Stock Exchange. The equities use an investibility weighting in the index calculation. The index was developed with a base level of 1000 as of December 30, 1983.
MOVE Index is a yield curve weighted index of the normalized implied volatility on 1-month Treasury options. It is the weighted average of volatilities on the CT2, CT5, CT10, and CT30. (weighted average of 1m2y, 1m5y, 1m10y and 1m30y Treasury implied vols with weights 0.2/0.2/0.4/0.2, respectively).
VIX Index is a financial benchmark designed to be an up-to-the-minute market estimate of the expected volatility of the S&P 500® Index, and is calculated by using the midpoint of real-time S&P 500 Index (SPX) option bid/ask quotes.
Bloomberg Commodity Index Bloomberg Commodity Index (BCOM) is calculated on an excess return basis and reflects commodity futures price movements. The index rebalances annually weighted 2/3 by trading volume and 1/3 by world production and weight-caps are applied at the commodity, sector and group level for diversification. Roll period typically occurs from 6th-10th business day based on the roll schedule.
The U.S. Dollar Index indicates the general international value of the USD. The USDX does this by averaging the exchange rates between the USD and major world currencies. The ICE US computes this by using the rates supplied by some 500 banks.
2025-
Fixed income instruments are subject to credit, market, and interest rate. Emerging market investments are subject to greater volatility and price declines.
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.
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