• There has been exceptional turbulence in fixed income markets this year, driven primarily by tariff-related uncertainties.
  
  
• Going forward, credit markets could offer attractive returns while their excess spread could help cushion potential losses if conditions deteriorate.
  
  
• Actively managed strategies with the right approach can generate alpha in fixed income during times of volatility and help investors navigate bond market swings. 

How should investors navigate bond market volatility?

Global bond markets have seen unprecented levels of volatility this year. Here, our active bond experts share five lessons to help investors navigate the turnoil in government and corporate bond markets, and how they’re positioning their portfolios for the road ahead.

1. Be data-dependent, not headline-dependent.

Ales: We’ve seen a huge amount of uncertainty in government bond markets this year, particularly in US Treasuries, where a sharp selloff in April saw 10-year Treasury yields surge more than 50 basis points (bps) in a single week.

A lot of the volatility has been driven by a divergence between the ‘soft data’ indicators showing sentiment is weakening, and the actual hard data telling a different story – one of relative strength. This has led to big swings over short periods as markets try to make sense of what it could mean for the economy and policy rates.

In both the US and Europe, the economies have remained surprisingly resilient so far this year, despite worries about tariff-related pricing pressures and slowdowns in growth. We think there’s a lesson here for investors: tune out the headlines and focus on what the actual data are telling us – this will hold the key to understanding whether interest rates move lower or higher.

In terms of our US policy outlook, our base case is still for two rate cuts by the US Federal Reserve (Fed) of 25 basis points each before the end of 2025. Even if tariffs lead to a bump up in inflation, if the consumer keeps spending, it should translate into a relatively stable environment – in which case the Fed may even choose to keep rates on hold, in our view. 

2. Credit offers more than just attractive returns.

Sarang: If you think about fixed income overall, and credit in particular, the outlook is still broadly supportive and favourable. In 2025, credit markets have been a positive story amid the volatility. Global investment-grade credit has outperformed the underlying global government bond curve and returns have been less volatile, as spreads have served as a diversifier against the volatility in government bond markets. 

Companies have faced an unprecedented number of economic challenges over the last five years, from the Covid-19 pandemic to very high inflation, to sharp rises in interest rates, to last year’s elections – and now the tariff uncertainty. As a result, corporate balance sheets have become much more resilient and are better prepared for a wide range of economic outcomes.

Our base case scenario is for credit spreads and yields to remain rangebound for the next 1-2 years. This isn’t necessarily a bad thing for investors. Higher starting yields mean high-quality credit can deliver returns of five-plus percent across most market scenarios - which we think is a very good outcome for any asset class over the next couple of years.

Although spreads are tight, they could move tighter, in our view. Assuming inflation remains contained and demand remains healthy - there’s no reason why spreads could not compress further in the months ahead.

3. Long-dated US Treasury auctions are a routine event - the attention they’re attracting is not. 

Ales: In April, long-dated Treasury auctions came into focus after a routine 30-year auction was poorly received – fuelling concerns about investors’ confidence in US assets. Auctions provide a useful barometer of the supply-demand dynamic in the Treasury market at a precise moment in time – but the results are not a reflection of the long-term fiscal health of the US government or a signal that investors are shunning Treasuries in their portfolios. Lond-dated bonds actually play a very small role in government funding, accounting for around 5% of most countries’ total bond programmes.

4. Volatility provides active opportunities at the long end of the curve.

Ales: Government yield curves in most major markets have been steepening over the last few years, which has created more volatility in longer-dated government bonds as well as opportunities for our actively managed portfolios. For example, in January 2025, our active team took an overweight position in long-dated UK gilts after the gilt market experienced a significant selloff that saw 10- and 30-year gilt yields surge to their highest levels in 20 years. The trades delivered strong returns and demonstrate how active managers can generate significant alpha in a core bond allocation relative to its benchmark. We expect the volatility at the long end of government yield curves to continue.

5. Think globally about core fixed income allocations.

Sarang: Global diversification used to be more of an equity story, but we’re seeing that same value translating across to fixed income portfolios. A globally diversified fixed income allocation that spreads its exposure across multiple geographies is an increasingly valuable tool in today’s environment, helping investors reduce their concentration risk and tap into opportunities around the world. Finding an active bond manager who can identify global opportunities amid an uncertain backdrop at the individual security level is critical for delivering a consistent alpha experience for investors.  

Ales: There’s been a lot of talk about investors shunning US assets and redirecting flows into other markets – this simply isn’t true. The US accounts for around 50% of the global fixed income market; in equities, it’s even higher (around 60%-70%). It’s not possible to build a globally-diversified portfolio without including the US.

Rather, many investors have been rebalancing their exposure to US assets, which have significantly outperformed non-US assets over the past 15 years.

This rotation out of the US has also been a headwind for the US dollar, which has depreciated more than 10% against the euro so far in 2025 and could weaken another 5-10%, in our view. Yet the US dollar was arguably overvalued before now, having been pushed up in value by US outperformance. The current revaluation is bringing the US dollar back more in line with its long-term historical averages relative to other currencies.

For more insights from our active fixed income experts on what lies ahead for bond investors, watch our recent active fixed income webinar.