Unusual Times, Unusual Bull Market

PGIM explores the fixed income market outlook for Q4 2025 characterized by low to moderate growth with mildly-sticky inflation.

Across most developed markets, conditions keep pointing to one outcome: a “Muddle Through” scenario characterized by low to moderate growth with mildly-sticky inflation. Generous yields across public and private credit continue to drive the yield-is-destiny theme, which may gain a tailwind from downward rate pressure on certain monetary policy regimes.

SUMMARY OF SECTOR VIEWS

Topics
  • Markets & Economy
Sector Outlook
DM Rates Although the sector remains vulnerable to numerous global crosscurrents, central bank easing biases create a mild tailwind for Western rates. Positioning remains tactical along yield curves and around market pricing.
Agency MBS Carry conditions. Even with tight OAS profiles, MBS carry remains intact versus intermediate Treasuries as the Fed easing cycle begins. We prefer a barbell position consisting of lower 30-year coupons and 30-year coupons near par, while avoiding the middle of the stack. We continue to favor better cashflows and convexity via specified pools rather than TBAs.
Securitized Credit Carry conditions. Securitized spreads generally remain wider YTD, but tighter than historical averages. Amid flat credit curves, high-quality securitized assets continue to offer attractive valuations relative to other fixed income sectors. Our outlooks for CMBS, RMBS, CLOs, and ABS reflect a tighter than average spread environment combined with weaker or normalizing underlying asset fundamentals. Our “carry” base case calls for limited total return potential—from limited capital appreciation—and thicker tails. We remain focused on tranches at or near the top of capital structures and are highly selective regarding more credit-sensitive positions given the risk/reward dynamic. In asset-based finance markets, positive capital flows continue; we are targeting structures suited to perform through the cycle in prime consumer, commercial, and residential subsectors.
Global IG Corporates Carry conditions. With IG corporate spreads near multi-decade tights, further spread compression is likely to be limited in Q4. Our base case calls for the U.S. and European economies to “muddle through” and for spreads to be range-bound near current levels. That stated, yields are still relatively high and continue to drive strong demand for IG corporate bonds.
Global Leveraged Finance Carry conditions. We expect global leveraged finance spreads to maintain a range near historical tights as persistently strong technicals and a sound credit environment are likely to continue to hold firm against prevailing global macro risks. While still constructive overall, we maintain our close-to-home defensive positioning in U.S. high yield bonds and loans as well as underweights to cyclicals and more focused on defensive sectors in Europe.
EM Debt Modest spread tightening and carry conditions. Despite elevated macro uncertainty, EM economic growth remains comparably high, fundamentals have broadly improved, and yields stand out versus other fixed income sectors. We remain focused on resilient issuers and are modestly cautious around spread risk as we have yet to observe the full impact of U.S. tariff policy. Due to stretched valuations, we are cautiously constructive on EM rates and expect the U.S. dollar to maintain its weakening bias. EM corporates continue to offer diversification opportunities.
Municipal Bonds Carry conditions. Muni rates remain attractive in both absolute terms and relative to Treasuries. September’s improved performance suggests that “Muddle Through” conditions pair well with Munis’ resilient profile. While taxable spreads have tightened, they remain wide to corporates, suggesting additional compression is possible.

Investing involves risks. Some investments are riskier than others. The investment return and principal value will fluctuate, and shares, when sold, may be worth more or less than the original cost. Investors cannot invest directly into an index. Fixed income investments are subject to credit, market, and interest rate risks, and their value will decline as interest rates rise. 

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.

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