The notion of fixed income as a core asset has been shaken in recent times. A decade of zero interest rates resulted in a yield desert for income-seeking investors. The era of inflation-induced interest rate rises then enabled cash to become a rewarding sanctuary. Yet, as the investment landscape continues to evolve, opportunities are re-emerging. We combine multiple perspectives to assess whether now is the time for investors to refocus on fixed income.
Improving macro picture
The macroeconomic environment has not been particularly supportive of fixed income for some time.
In the aftermath of the Great Financial Crisis, central bank zero interest rate policies pushed fixed income yields down to historic lows – with some falling into negative territory. Supply constraints and fiscal intervention during the Covid-19 pandemic then propelled inflation to its highest levels this century, pushing interest rates up in quick succession. This meant that investors, having been forced to seek income from higher-risk assets such as equities, emerging market debt or alternatives, were then able to park their cash in the safety of money-market instruments. As yields topped 5%, investors flocked to US money-market funds and assets reached a record USD6.7 trillion in late 20241 .
Right now, the macro picture is more positive for fixed income. Inflationary pressures have abated, and the global economy is growing at a reasonable pace, with low and stable unemployment. Moreover, having been forced into rapid action by the two aforementioned crises, central banks have been able to embark on the current monetary easing cycle, albeit at varying paces. With interest rates falling and bond yields at attractive levels, investors are incentivised to move their assets out of cash and back into fixed income.
A sweet spot for fixed income
The sector now offers a sweet spot of opportunity.
Firstly, volatility levels are normalising. Having been suppressed during the era of quantitative easing and then aggravated by surging inflation, markets can now react to fundamentals in a way they haven’t been able to for years, which is opening up opportunities. In addition, as central banks are no longer being forced into coordinated action by the onset of crises, economic dispersion is adding another layer of investment prospects. The different timing and pace of rate cuts mean investors can take advantage of intra- and cross-market inefficiencies or time allocation changes.
Finally, fixed income has recaptured some of the familiar qualities that investors have traditionally relied on, including income capital preservation, liquidity and diversification. These defensive attributes may prove useful as the ever-shifting market backdrop could still encounter potential headwinds.
Risks and uncertainty remain
Consensus economic forecasts may point to a smooth landing for developed economies, but this outcome is far from guaranteed. A significant element of risk could come from the changing geopolitical landscape, particularly with Donald Trump’s second term.
While the Trump administration’s direction of travel on taxes, tariffs, deregulation, foreign policy and immigration has been clearly articulated, there remains considerable uncertainty about how such policies will be enacted. Trump’s efforts to tighten immigration and enforce broad tariffs may prove inflationary, which could easily be further compounded by stronger growth in spending and falling unemployment.
The cumulative impact of the tariffs looks as if it will be vastly greater than anything imposed in Trump’s first term. They appear to be — by a substantial measure — the largest protectionist steps that the United States has taken since the Second World War.
US tariffs are a self-imposed supply shock. They lower the quantity of goods available to the US economy and raise their prices. That represents a push toward stagflation— meaning higher inflation and slower economic growth. Quantifying the stagflationary impulse is hard because we don’t know how long the tariffs are going to last, in what ways they are going to be extended, or in what ways other countries are going to retaliate.
At the same time, the risk of a recession in the US can’t yet be completely dismissed. Europe was seen as being most at risk of recession in 2025 but the speed and magnitude of the intended fiscal expansion in Germany will boost economic growth.
Either of these scenarios would force a major re-think of central bank policy – either keeping rates higher than expected in the case of inflation or more rapidly lower if a recession seems likely.
The steady rise in government debt, particularly in Europe, is raising concerns that investors may soon demand better returns for taking on sovereign debt – a situation known as bond vigilantism.
If President Trump enacts further tax cuts, or as European governments borrow more to quickly fund higher defence spending, markets may face volatility as yields are pushed sharply higher.
A perfect outcome for markets can never be assured, but it’s important to recognise that volatility creates dispersion, which can then lead to a greater number of investment opportunities for active managers.
Breadth of opportunity
The fixed income market is not homogenous. The attractiveness of different parts of this broad asset class can vary depending on where we are in the market cycle.
Corporate bonds may seem expensive, but demand is expected to remain strong, benefiting in part from the rotation from increasingly lower-yielding money-market funds to higher-yielding credit funds. In 2024, new global issuance totalled USD 9.3 trillion, up 20% from $7.7 trillion in 20232,, and was easily absorbed by the market. Issuance for 2025 is expected to grow modestly on the back of higher investment in AI and growth in mergers and acquisitions, and there’s no reason to expect the appetite for these assets to wane. Looking ahead, a sizeable wave of corporate refinancing could also push yields higher (and lower prices).
The euro high-yield segment has been performing well, with relatively low volatility. Its resilience to both external shocks and negative idiosyncratic events within the high-yield universe demonstrates that the segment is now more mature and of better intrinsic quality than a few years back. Given the improving economic outlook for Europe, prospects should remain attractive.
Robust fundamentals are also supportive of emerging market (EM) debt. Most EM central banks are further along the cutting cycle than their developed market peers, therefore emerging market debt could be seen as a better place to take interest-rate risk. However, EM debt remains an area where country selection is key.
Time for fixed income
The world is not standing still. While rapid geopolitical and economic change creates investment opportunities, it also increases uncertainty and forms fresh challenges.
At BNP Paribas Asset Management, we believe now could be the optimal time for fixed income to reclaim its place at the heart of investors’ portfolios due to its potential to provide both attractive returns and useful places to hide. By analysing multiple viewpoints, we aim to channel the opportunities catalysed by a more volatile world into long-term sustainable returns for our clients investing in fixed income.
[1] MarketWatch: Money-market fund assets surge to $6.7 trillion record
[2] S&P Global: Global Financing Conditions: A Mixed Picture As Uncertainty Builds, But The Issuance Forecast Remains Positive
