For investors, the same narrative characterised the past two years. Strong US growth stood in stark contrast to slower economic activity in Europe and China. Fixed-income performance was challenged, while select mega and large-cap equities led the way. Meanwhile, the US dollar, gold, and bitcoin all saw positive momentum.
But we believe the tempo is changing in 2025. “Expected returns are likely to be more balanced between assets classes in the coming months, based on our economic research and historical comparisons over 30 years”, said Yannik Zufferey, CIO, Core Business, at the 2025 Fixed Income CIO Outlook event, held by Lombard Odier Investment Managers in Geneva recently.
Bonds to the fore…
With the macroeconomic environment improving amid stark differences in valuations among asset classes, Zufferey believes a nominal recovery is underway and should benefit active managers. Better economic conditions are largely attributable to the central-bank easing cycles that commenced in 2024, which should support growth moving forward.
In a nominal recovery, fixed-income assets exhibit considerable return potential accompanied by moderate volatility
In this scenario, fixed-income assets – from investment-grade (IG) and high-yield (HY) credit to emerging-market (EM) debt – exhibit considerable return potential accompanied by moderate volatility, making them increasingly appealing, in Zufferey’s view (see Figure 1). “We believe these assets are positioned to outperform developed-market equities and commodities, primarily due to favourable carry and valuation metrics,” he said.
Within fixed income, Zufferey identified the BBB-BB or ‘crossover’ segment as particularly attractive for potential risk-adjusted returns. The same is true for convertible bonds, which may benefit from good valuations, high carry and a historically positive response to nominal recoveries. Considering hedging costs, Swiss fixed-income assets will also be well positioned in terms of expected returns.
Even in the case of a hard landing, fixed income has the potential to outperform other assets classes, he said, due to carry levels that have been available and the inherent resilience of IG instruments to downturns. This cemented his favourable view of the asset class for the year ahead.
FIG 1. Expected 2025 returns by economic scenario1,2
Read also: In a year of divergence, three shifts in 2025 should favour active managers
…but selectivity is key
Accompanying the expected macro changes this year, Sandro Croce, CIO, Fixed Income, sees the risk dynamics within fixed income shifting from the recent trends.
“While the past two years have clearly been dominated by monetary policy, in 2025 factors from trade tariffs to fiscal policy are likely to play a significantly more important role in a more complex macro environment,” he said. “That’s why opportunistic and dynamic management of risks and opportunities will be key.”
For Croce, the sustainability of national debt burdens remains a persistent risk. Sensitivity to treasury refinancing and budget deficits remains high, especially in the US, where this topic could become subject to political debate in the following months. Diverging economic fortunes on either side of the Atlantic are also front of mind, with the US accelerating ahead of Europe. But carry compensates nicely for these risks, while the short-term uncertainty warrants a more balanced stance with a mix of lower duration and higher-quality credit, Croce said. IG credit is pivotal in achieving such an exposure – especially during a nominal recovery – making the segment his highest conviction at present (see Figure 2).
“We see value in IG corporate bonds in particular, which offer an attractive mix of duration risk and credit risk and are likely to perform well in a strong economic environment,” Croce said.
FIG 2. Change in LOIM convictions by fixed-income sector, Q4 2024-Q1 20253
Read also: Fixed income in 2025: a balancing act featuring credit, carry and duration risk
Swiss bonds: why we like corporates
As a Swiss investment house, it is natural for us to focus on the outlook for domestic assets. In terms of macro conditions, Switzerland stands out on several metrics. Notably, over the last 20 years, average real growth has consistently exceeded that of the largest European countries and is expected to do so in 2025 as well.
“In this environment, Swiss corporate bonds stand out, with top quality and ratings,” according to Markus Thony, Head of Swiss Fixed Income. Overall, he sees four reasons to favour corporates:
- The credit fundamentals of issuers are still solid. The macroeconomic environment continues to be supportive (see Figure 3). Nevertheless, more selectivity is required in the current environment
- Corporate bonds can improve diversification. Combined with duration risk, credit risk in can help to reduce volatility and drawdown risks for portfolios
- Credit expertise increases the opportunity set. Being able to invest across an issuer’s capital structure, from senior to sub-IG debt, offers opportunities to benefit from a range of risk-return profiles
- Systematic credit risk exposure to the Swiss bond market often delivers benefits. Good average issuer quality usually results in low default risk. As a result, credit risk premiums can often be harvested over the long term.
With yields retreating to notably low levels, investors will undoubtedly value alpha generation. This means that skilled managers with proven expertise and experience are needed to handle the specificities of the Swiss markets. For investors, accurately factoring in the cost of hedging will be essential over the next year, especially to avoid the misleading perception of higher rates outside Switzerland.
FIG 3. Constructive combination: economic expansion and subdued inflation in Switzerland4,5
Read also: Swiss bonds: the importance of managing risk premia
Bright spots in Asia
Markets baulked when the US imposed 10% tariffs on Chinese imports in early February. But investors should remember that China’s economy has diversified and that exports to the US currently account for only 2.5% of its GDP6, said Dhiraj Bajaj, CIO of Asia Fixed Income and Equities. Since 2019, China has strengthened commercial ties with EMs: exports to BRICS and ASEAN countries have risen by 56% to nearly equal its combined exports to the European Union and the US.
Bajaj said China’s economic transition from a real-estate-centric to services-driven model will continue. More broadly, the region will also benefit from strong macro drivers in India and stable conditions in North Asia (see Figure 4).
Since 2019, China’s exports to the BRICS and ASEAN markets have risen by 56% to nearly equal its combined exports to the European Union and the US.
He said 2024 was a strong year for Asia Credit, with the JP Morgan Asia Credit Index (JACI), JACI IG, and JACI HY returning 5.7%, 4.2%, and 15.2%, respectively7. The main driver of performance was 90 basis points of compression in credit spreads, offset by a 60 bps widening in 7-year US Treasury yields7.
Valuations versus DMs are still attractive in the IG segment, he said, but more so in the HY space, with potential returns for this year ranging between 5-8% and 8-11% respectively. The Asia-EM HY market seems to have experienced virtually no default cycle, with spreads to continuing to compress.
FIG 4. Key macro factors for India and North Asia in 20258
Read also: Asian markets: long-term tailwinds fuelling growth, consumption and tech
Covering bull and bear scenarios
Whether a growth recovery continues or the economy makes a hard landing, fixed income has the potential to benefit investors in 2025, in our view. In our base-case scenario of a nominal recovery, most segments of the asset class exhibit considerable return potential with moderate volatility, given the carry on offer and supportive growth backdrop. We see value in IG corporate bonds in particular, due to the attractive mix of duration risk and credit risk they offer. In the event of a hard landing, the carry available and inherent defensiveness of the asset class should help insulate portfolios. As the new US administration deploys new economic policies, this should provide a degree of reassurance.
