Market Insights at a Glance
We anticipate a favorable environment for fixed-income investments in 2025 driven by strong global growth, overall progress on inflation and select opportunities arising from market volatility. While the US is likely to continue outpacing other developed market (DM) economies, we anticipate a narrowing growth gap and selective opportunities across various credit markets.
This summary is intended to aggregate the Firm’s current overall views and present an at-a-glance dashboard.*
Growth
Convictions
- We expect global growth to remain positive but slow down somewhat from recent levels.
- The US should continue to outpace other DM economies, though the gap will likely narrow.
- The eurozone and China will face ongoing struggles, though the former may see some improvement as monetary policy easing drives investment activity.
Rationale
Inflation
Convictions
- We expect global inflation to continue its downward trend, nearing central banks’ 2% target.
- The US will continue to face more stubborn inflation compared to other DM economies. Historically, the US has experienced stickier inflation when the rate has approached 2%.
- We anticipate services inflation to grind lower, contributing to the overall decline in headline inflation.
Rationale
Rates
Convictions
- We anticipate shorter-term rates will likely decline, providing a more stable source of duration, as they tend to align with potential central bank rate cuts.
- Yield curves are likely to steepen, not just in the US but globally, due to ongoing fiscal concerns.
- We are monitoring opportunities in DM rates and remain overweight duration, particularly in the eurozone, the UK and Australia.
Rationale
Monetary Policy
Convictions
- We expect central banks to have room to cut rates further, though the magnitude and timing will vary globally.
- The Federal Reserve’s (Fed) goal of achieving 2% inflation in the US remains challenging due to inconsistent progress and the stickiness of services inflation.
- The European Central Bank (ECB) has cut its deposit rate by 100 basis points since last summer, but policy rates are still high relative to historical averages.
Rationale
Credit Markets
Convictions
- We believe that corporate credit fundamentals are strong, given encouraging free cash flow generation and balance sheet health.
- Despite tight spreads, we believe there are still opportunities in specific sectors such as financials and European utilities.
- We expect pockets of volatility to provide opportunities to add to credit positions at more attractive valuations.
Rationale
Geopolitics
Convictions
- Trump’s trade policies, particularly tariffs, are likely to cause temporary market disruptions.
- Other geopolitical factors include Trump’s border and immigration policies, protectionist rhetoric and aggressive international negotiating tactics.
Rationale
*As of 31 Dec 24
Trump, Tariffs and Protectionist Policies
As featured in our new Macro Market Trends publication, the kickoff of Trump’s second term is almost certain to cause bouts of market volatility, as he made tariff threats a central part of his campaign. The proposed tariffs, particularly targeting China, the eurozone and Mexico, are expected to have significant global economic implications. While the exact timing and severity of any actual tariffs remain uncertain, the shift toward protectionism is clear. The potential tariffs could lead to higher inflation while dampening economic activity for key trading partners. The broader impact likely includes weaker global growth and potential retaliatory measures from affected countries. Latin America, particularly Mexico, could face economic pressures from a stronger dollar and lower oil prices. Japan and the eurozone may experience modest disinflation and weaker growth due to reduced exports. Asian economies, especially China, may mitigate impacts through fiscal and monetary measures. Australia, with its strong trade ties to China, could see softer economic growth and inflation.
Even before Trump 2.0, US trade policy had become increasingly protectionist.
- The executive branch can independently drive trade policy, unlike fiscal policy, which requires legislative approval.
- Trump’s approach is blunt compared with Biden’s sector-specific tariffs.
The 10% tariffs Trump proposed risk a broader disruption to trade and markets.
- Exchange rates, prices paid by consumers and exporter margins would likely absorb the brunt of across-the-board tariff increases.
- Larger tariffs applied to China could divert some production to other countries, risking scrutiny on re-imports.
- We expect US trading partners to respond with reciprocal tariffs, which could increase geopolitical tensions.
Optimism Amid Volatility
Western Asset expects 2025 to be a good year for fixed-income investments, primarily supported by the following views:
- Primary Driver of Returns: Income and yields will be the main contributors to returns, rather than dramatic rate moves. Yields are currently at attractive levels, and the US yield curve has normalized (disinverted) to an upward slope.
- Economic Expectations: We expect global growth to remain positive but to slow from current levels. The US is expected to outperform other DM economies, although the gap may narrow.
- Anticipated Volatility: We expect a spike in volatility episodes over 2025, primarily due to the incoming Trump administration’s posturing related to trade and tariffs. But only time will tell if the rhetoric matches the results. Regardless, volatility this year should create investment opportunities that reinforce the value of working with an active investment manager.
- Inflation: The fight against inflation should continue to make good progress, though it will be inconsistent across regions. While trending lower, inflation in the US—especially compared to other DM countries—remains sticky, particularly within the services sector.
Western Asset Investment Themes
| Asset Class | Our View |
|---|---|
| Overall Risk Assets | We expect spread sectors to face periods of volatility due to geopolitical and economic uncertainties, including the new Trump administration policies and ongoing fiscal concerns. However, strong fundamentals and technicals in sectors like corporate credit and structured products provide opportunities for selective investment, with a focus on maintaining flexibility to capitalize on market dislocations. |
| Investment-Grade Credit | We are focusing on sectors with strong fundamentals and attractive relative value, such as financials, while being mindful of the tight spreads and positioning portfolios to take advantage of any market dislocations that may arise. |
| High-Yield Credit | We are maintaining exposure to sectors with good fundamentals and strong technicals, while being prepared to opportunistically add to positions during periods of market volatility, leveraging our sector teams’ insights to identify attractive opportunities. |
| Structured Product | We see attractive opportunities in commercial mortgage-backed securities (CMBS) and collateralized loan obligations (CLOs), where spreads remain wider compared to investment-grade corporate bonds. Fundamentals remain strong, supported by high-quality new issuance and manageable supply. |
| EM Debt | With nominal rates at decade highs and real yields averaging close to 4%, we see attractive local market rate opportunities in select countries like Mexico. |
| Geopolitical and Economic Risks | Key risks that could impact financial markets and fixed-income strategies include fiscal concerns in the US and other countries like France and the UK, along with the potential for central banks to stay too restrictive or for growth to be too strong. |
