3Q 2025 Fixed Income Outlook: Opportunities amid policy-driven volatility
Michael Goosay
Entering the second half of the year, interest rates will likely see a more bullish trend driven by slower economic growth and accelerated expectations for a resumption of Fed rate cuts.
Over time, this should lead to returns consistent with the long-term averages of the asset class. As most of the return from fixed income is duration-dependent, investors should look to parts of the fixed income market, such as investment grade and securitised credit, that are higher quality but still more sensitive to interest rate risk.
Key report findings
1. Policy volatility: an anticipated one-time inflation shock
Markets continue to grapple with the competing forces of inflation resilience and slowing U.S. growth as the Federal Reserve holds policy steady in pursuit of its dual mandate. Tariff actions will likely trigger bouts of volatility as investors await the transition from trade frameworks to actual trade agreements. As inflation runs above target, investors await a one-off price shock tied to tariffs. In turn, as the U.S. economy likely slows, the stagflationary tilt to the outlook remains, and the U.S. yield curve continues to steepen in response.
2. Credit fundamentals: resilient as spread narrows into mid-year
Going forward, investor focus should shift to economy and the opportunistic credit fundamentals within the fixed income market. Slow growth should not be confused with recession, and headline risk and trade sensitivity will likely create wider dispersion among sectors. In this environment, active issuer selection and credit discipline are increasingly important.
3. Valuation resets create opportunity
Although spreads moved wider immediately after Liberation Day and then narrowed back through the final weeks of the quarter, further tightening is unlikely at this point. Nevertheless, emerging markets, securitized assets, and private credit present attractive risk-adjusted opportunities for long-term investors. Active management remains critical for navigating volatility and uncovering value.
By Michael Goosay, Chief Investment Officer, Fixed Income
