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The unusual bull market that started towards the end of 2022 continued through the second quarter of 2025. In contrast to a typical bull market where the dominant driver of returns consists of a wholesale drop in yields, this bull market continues to be mostly fueled by the simple accrual of yield itself as well as the incremental return on spread products. Credit products have not only posted the best performance this year, but they have also turned in the best performance over the duration of the bull market. The riskier sectors, such as high yield and emerging market hard currency, have posted the highest returns.
Looking ahead, geopolitical risks and trade tensions will likely remain high. However, moderate growth and moderating inflation in major developed markets look set to continue, with Western central banks generally expected to hold or cut rates in the quarters ahead. In turn, this is likely to keep overall rate levels stable to lower, albeit with the potential for further yield curve steepening. On net, this backdrop of stable to falling rates should support the bond market overall. We expect to see intermittent bouts of volatility in credit spreads as events unfold. Nonetheless, the underlying durability of fundamentals, along with the favorable supply/demand balance in credit markets, generally suggest that spreads may remain towards the bottom end of their historical ranges in the quarters ahead. This should support further, albeit more modest, outperformance by credit products.
Despite headline-driven bouts of volatility, stable-to-lower yield curves with range bound credit spreads should allow the bond bull market to continue. Selectivity will be key, with the higher yielding credit sectors likely delivering the highest returns.
At a glance – PGIM Fixed Income sector views:
The full PGIM Fixed Income Market Outlook is available for professional investors only.
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