Fixed Income

Fixed Income Offers Stability for Uncertain Conditions

Jun 18, 2025
 

PGIM Fixed Income’s Greg Peters explains why bonds stand out in times of slow growth and mounting risks.

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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 stabilising 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

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Source: Bloomberg as 31/5/2025. Data shows average annualised 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.
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Source: Bloomberg as 31/5/2025. Data shows average annualised 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.
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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.

Gregory Peters, Co-Chief Investment Officer, PGIM Fixed Income

<p>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.</p>

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.

References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. The securities referenced may or may not be held in the portfolio at the time of publication and, if such securities are held, no representation is being made that such securities will continue to be held.

 

The views expressed herein are those of PGIM investment professionals at the time the comments were made, 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 investment advice or an offer to sell or a solicitation to buy any securities mentioned herein. Neither PFI, its affiliates, nor their licensed sales professionals render tax or legal advice. Clients should consult with their attorney, accountant, and/or tax professional for advice concerning their particular situation. 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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