Tactical Turns in the Slow-Go Bull Market

In this 2Q 2025 outlook, PGIM Fixed Income shares its views on the current economic environment and outlook for fixed income markets.

In an environment of pervasive macro risks, three themes in PGIM Fixed Income’s Q2 Outlook warrant emphasis:

  • Bonds are positioned for an extended period of solid returns, and they should outperform cash and equities if serious downside risks materialize;
  • Ongoing policy confusion seems destined to continue to prompt bouts of market turbulence that precipitate relative value opportunities;
  • The post-COVID bond market has been prone to dramatic overreactions followed by course corrections with a clear lesson: don’t confuse extreme market movements with changes in fundamental market trends.

Robert Tipp, CFA, Chief Investment Strategist and Head of Global Bonds, looks at the factors that may support fixed income performance amidst the relentless uncertainty as well as the divergent trends across global markets in “Tactical Turns in the Slow-Go Bull Market.”

As PGIM Fixed Income distills the first quarter’s volatility and confusion, they see further economic moderation ahead with sizable risks to the downside. Not surprisingly, the tails of their distribution have thickened as the global trading order gets turned on its head. In the U.S., the delta pertains to the tail scenario of rising recession risks. In the euro area, the latest tariff developments potentially offset some of Germany’s bold fiscal announcements. Find additional details in “Convergence in a World of Thick Tails,” by Katharine Neiss, PhD, Deputy Head of Global Economics & Chief European Economist. 

Sector Outlook
Developed Market Sovereign Rates Focusing on fundamentals and fading extreme moves under volatile conditions.
Agency Mortgage Backed Securities (MBS) Negative in the short term. The technical backdrop has deteriorated, and interest-rate volatility is likely to remain elevated. We maintain a preference for seasoned, lower 30-year coupons and production coupons.
Securitized Credit Despite the broad spread rally over the past year, securitized products continue to offer compelling value vs. other fixed income asset classes. We continue to favor tranches at or near the top of securitized capital structures given their attractive relative value and risk-adjusted return potential. We expect spreads to remain around historical averages, keeping carry as the dominant theme. While solid technicals could lead to further spread and credit curve compression, we favor positioning in shorter spread duration investments. Likewise, we remain extremely selective regarding more credit-sensitive positions as credit curves appear too flat, and the downside risks associated from indiscriminately traveling down the capital stack outweigh the potential rewards.
Global IG Corporates We are becoming more cautious as the path to strong excess returns over the coming months may narrow. This caution is due to the rollout of U.S.-centric policies, the respective responses, and the likelihood for further market volatility. Although the performance of global IG corporates has been supported by healthy demand for all-in yield, cracks are beginning to emerge as U.S. policy uncertainty climbs dramatically and threatens to reorder global trade relationships.
Global Leveraged Finance Cautious. Solid market dynamics should hold against elevated macro uncertainty. While the Trump administration’s agenda may seek long-term economic benefits, we are wary of the near-term effects. As such, we maintain our close-to-home defensive positioning with an overweight to high-quality, short-duration high yield in the U.S. and underweights to cyclicals as well as potential tariff-impacted names in Europe.
Emerging Market (EM) Debt Maintaining focus on fundamentals, while emphasizing relative value and idiosyncratic opportunities. Despite ongoing near-term tariff and global macro risks, EMD should remain resilient over the medium term, and the longer-term constructive attributes of an evolving global backdrop continues to anchor our investment thesis. The potential waning of U.S. economic and market exceptionalism could give way to rest-of-the-world opportunities and clearer identification of potential EM “winners” and “losers.” The recent reversal of U.S. dollar strength, healthy global liquidity conditions, and the attractive carry on EMD spreads, FX, and rates also temper our near-term concerns.
Municipal Bonds Cautious as technicals are expected to become more challenging as net supply turns positive. Yet, muni credit fundamentals remain strong, with healthy balance sheets, although credit fundamentals have likely peaked given ongoing challenges emanating from the new administration. In addition, talks of ending the tax-exemption, while unlikely due to probable bipartisan support for the exemption, could still pull issuance forward (e.g., for private issuers, hospitals, and private universities).

The full PGIM Fixed Income Market Outlook is available for professional investors only.

The views expressed in this article are those of PGIM Fixed Income as of April 2025.

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 member FINRA and SIPC. PGIM Fixed Income is a unit of PGIM.

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