Principal Fixed Income
Fixed income perspectives
Themes, outlook, and investment implications across
global fixed income markets
1Q 2025
Looking ahead to 1Q 2025:
Fixed income opportunities in a dynamic global environment
As the Federal Reserve continues its gradual rate-cutting cycle, the U.S. economy demonstrates resilience in the face of evolving policy shifts and geopolitical uncertainties. Fixed income markets are navigating diverging central bank approaches, presenting both opportunities and challenges for investors. With elevated yields, robust credit fundamentals, and selective opportunities across asset classes, fixed income offers an attractive landscape heading into the new year.
Evolving Monetary Policies Shape Markets
Central banks worldwide are easing cautiously, with the Federal Reserve maintaining a measured pace of rate cuts while other central banks weigh policy adjustments amid uneven global growth and trade uncertainties.
Resilient Fundamentals Support Fixed Income
From investment grade to high yield, municipals, and private credit, solid credit metrics and favorable demand dynamics are helping offset tighter spreads and volatility, creating a foundation for attractive total returns.
Selective Opportunities Across Asset Classes
Elevated yields across emerging market debt, securitized credit, and municipals highlight the importance of active management as investors capitalize on yield premiums, diversification benefits, and sector-specific strengths.
Market environment
Market environment
Year-to-date performance, spread, and yield for various fixed income indices
1
Performance (YTD, %)
2
Spread (bps)
3
Yield to Worst (%)
MIN
AVG
MAX
287
211
263
54
80
22
7
-156
321
418
92
122
55
36
-11
720
1100
260
373
325
132
250
262
93
89
64
42
-90
MIN
AVG
MAX
4.2
2.8
5.5
6.5
3.1
6.1
3.6
2.4
3.0
2.2
2.4
1.0
3.5
3.5
1.3
3.6
1.7
0.4
0.9
0.4
0.9
5.7
8.7
11.7
6.5
13.1
6.4
6.0
6.0
5.1
4.5
6.3
7.0
4.6
8.9
4.7
4.4
4.5
3.8
3.3
U.S. Aggregate
1.25
U.S. Bank Loans
U.S. HY Credit
Emerging Market Debt
U.S. ABS
U.S. CMBS
U.S. Municipals
U.S. IG Credit
U.S. Treasury
U.S. MBS
8.70
8.19
6.58
5.02
4.68
2.13
1.20
3.84
2.30
-5%
-3%
-1%
-0%
1%
3%
5%
Data as of September 30 2024. Source: Bloomberg, Principal Fixed Income. 1Total returns for representative indices. 2Spread to Treasury. Min, max, and average based on last 10 years. 3Index yield to worst. Min, max, and average based on last 10 years. Weighted average yield-to-maturity reflected for U.S. Bank Loans. Indices are unmanaged and do not take into account fees, expenses, and transaction costs, and it is not possible to invest in an index.
Indices used in order of appearance: Bloomberg U.S. Aggregate Index, S&P/LSTA (Loan Syndications and Trading Association) Leveraged Loan 100 Index, Bloomberg U.S. Corp HY 2% Issuer Capped Index, J.P. Morgan EMBI Global Diversified Index, Bloomberg Asset-Backed Securities Index, Bloomberg CMBS ERISA-Eligible Index, Bloomberg U.S. Municipal Bond Index, Bloomberg U.S. Credit Index, Bloomberg U.S. Treasury Index, Bloomberg U.S. MBS Index
U.S. outlook
Year-to-date performance, spread, and yield for various fixed income indices
1
Performance (YTD, %)
2
Spread (bps)
3
Yield to Worst (%)
The U.S. economy enters 2025 as a standout performer globally, demonstrating remarkable resilience despite headwinds. Robust consumer spending continues to drive economic growth, supported by historically elevated federal deficit spending, strong wage gains, and wealth effects from stock market gains and stable housing prices. While the labor market is gradually cooling, with higher unemployment rates and slowing hiring, layoffs remain limited, pointing to measured adjustments rather than sharp downturns.
Inflation has shown signs of moderation, particularly in shelter and goods prices, but some services sectors remain stubborn. The Federal Reserve is expected to pursue cautious policy normalization, with gradual rate cuts likely through mid-2025. While the removal of election uncertainty is positive, the incoming Trump administration’s fiscal and trade policies introduce new variables. Tariffs, tax reforms, and reduced immigration could create inflationary pressures and impact labor markets and growth.
Despite these uncertainties, attractive yields, resilient fundamentals, and a bumpy but improving inflation environment support a sanguine outlook for fixed income.
MIN
AVG
MAX
414
319
55
92
121
36
-14
287
1100
720
325
260
373
132
250
253
211
22
54
74
7
-156
220
44
80
80
43
-122
MIN
AVG
MAX
4.9
1.0
3.6
3.5
3.5
0.4
1.3
1.7
0.9
0.9
0.4
2.9
6.2
6.5
5.5
2.5
3.1
3.6
3.1
2.4
5.7
13.1
11.7
8.7
6.0
6.5
6.4
6.0
4.5
5.1
8.0
7.5
6.7
4.7
5.2
5.3
5.3
3.7
4.5
2.2
U.S. Aggregate
1.25
U.S. Bank Loans
U.S. HY Credit
Emerging Market Debt
U.S. ABS
U.S. CMBS
U.S. IG Credit
U.S. MBS
U.S. Municipals
U.S. Treasury
8.70
8.19
6.58
5.02
4.68
2.13
1.20
1.05
0.58
-5%
0%
5%
10%
-5%
-3%
-1%
1%
3%
5%
7%
9%
11%
= Current Value
Source: Bloomberg, Principal Fixed Income. Data as of December 31, 2024. 1 Total returns for representative indices. 2 Spread to Treasury. Min, max, and average based on last 10 years. 3 Index yield to worst. Min, max, and average based on last 10 years. Weighted average yield-to-maturity reflected for U.S. Bank Loans. Indices are unmanaged and do not take into account fees, expenses, and transaction costs, and it is not possible to invest in an index.
Global outlook
Global fixed income enters 2025 at a pivotal moment, with central banks outside Japan shifting toward easing monetary policy in response to cooling inflation. The U.S. remains a bright spot, with resilient growth and a strong labor market, while much of the rest of the world continues to struggle below potential. Divergent growth paths and uncertainties around fiscal and trade policies create challenges for synchronized global recovery.
The incoming Trump administration’s tariff implementation and tax reforms could inject volatility into global markets, particularly for economies reliant on trade with the U.S. Meanwhile, geopolitical risks—including the ongoing Russia-Ukraine war, tensions in the Middle East, and OPEC’s efforts to stabilize oil prices—add to the complexity of the outlook. As central banks assess these dynamics, monetary policy adjustments will likely lag, with cautious approaches prevailing until clearer growth and inflation signals emerge.
Despite these uncertainties, the global fixed income environment remains constructive, with opportunities in regions and sectors poised to benefit from localized recoveries and easing financial conditions.
Click key to isolate
Investment implications
While economic challenges remain, we see opportunities in fixed income.
Investment
grade credit
Credit quality of the investment grade bond index
J.P. Morgan U.S. Liquid Investment Grade Corporate Index, 2015–present
BBB Total
>=AA-
A+
A
A-
BBB+
BBB
BBB-
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
9%
9%
9%
9%
9%
10%
11%
11%
11%
14%
6%
7%
8%
11%
12%
8%
13%
13%
9%
9%
18%
18%
17%
14%
14%
14%
15%
14%
12%
17%
16%
16%
16%
16%
16%
18%
19%
17%
19%
17%
51%
46%
44%
19%
18%
18%
17%
17%
16%
19%
17%
18%
19%
21%
20%
20%
19%
19%
20%
16%
16%
20%
15%
13%
13%
12%
12%
12%
12%
11%
11%
11%
10%
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
Source: J.P. Morgan, Bloomberg, Principal Fixed Income. Data as of April 30, 2024.
Investment grade credit is positioned for stability and attractive returns in 2025, supported by steady growth, contained inflation, and moderate interest rates. The U.S. consumer continues to underpin economic resilience, aided by the Federal Reserve’s measured easing and the recent election outcome emphasizing deregulation and tax cuts. Corporate balance sheets remain strong, and spreads, while tight, reflect robust investor demand and solid credit fundamentals.
Despite nearly $1.6 trillion in issuance during 2024—the second highest on record—technical conditions remain favorable, with net supply expected to decline in 2025 due to maturing bonds from the pandemic era. Yields above 5% enhance the appeal for income-focused investors, while the steepening yield curve between 2- and 10-year Treasuries provides additional support.
With these factors in play, investment grade credit offers a compelling blend of stability and income generation. Quality credit selection and yield curve positioning will remain critical to maximizing opportunities in the year ahead.
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High yield credit
High
yield credit
High yield credit offers an appealing mix of elevated yields, strong fundamentals, and opportunities for total returns in 2025. Yields above 7% and credit metrics that remain solid, despite modest deterioration, underpin the asset class’s resilience.
Leverage for high yield issuers has edged above 4x but remains below the long-term average of 4.3x, while interest coverage of 4.7x exceeds historical norms, supporting issuers’ ability to service debt.
New issuance in 2025 is projected at approximately $350 billion, with refinancing dominating but a greater share allocated to growth-oriented activities such as M&A and LBOs. Although spreads are tighter than historical averages, the higher quality and shorter duration of today’s index provide a strong foundation. Modest spread widening is expected, but starting yields in the 7–8% range historically produce compelling returns.
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Securitized debt
Securitized
debt
Securitized debt is poised to benefit from easing monetary policy, resilient consumer fundamentals in 2025. Declining interest rates are expected to moderate delinquencies in asset-backed securities (ABS) and support modest growth in home sales, while residential mortgage-backed securities (RMBS) performance should remain stable as homeowners continue to enjoy locked-in mortgage rates well below prevailing levels.
Pro-business deregulation and lower rates should ease debt burdens for corporate and commercial borrowers, driving green shoots in the commercial mortgage-backed securities (CMBS) market despite maturity risks and rising delinquencies in office properties.
New issuance across structured credit markets is expected to remain robust, with strong demand from banks and a risk-on sentiment supporting valuations. Despite significant spread tightening in 2024, structured credit remains attractive relative to corporate bonds, offering compelling absolute yields. Opportunities in AAA-rated CLOs and single asset single borrower CMBS provide flexibility and attractive spreads, making securitized debt a valuable allocation for income and risk-adjusted returns.
Securitized credit new issue spreads
Five year range, bps, November 2019–November 2024
Current
Mean
CLO AAA
CLO AA
Subp. Auto
Equipment
Consumer
NQM AAA
CMBS AAA
CMBS BBB
SASB AAA
SASB BBB
IG Corp
HY Corp
99
135
22
20
57
75
62
309
60
141
75
288
270
393
437
412
617
525
266
1350
236
555
375
1037
132
154
160
211
70
87
55
77
85
138
120
152
100
122
746
748
138
146
291
291
80
121
298
426
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Municipals
Source: Bank of America Securities, Wells Fargo Securities, Bloomberg, JP Morgan, Principal Fixed Income. Data as of November 30, 2024.
Municipals
Municipals offer a compelling combination of high yields, strong credit quality, and diversification benefits as we enter 2025. Decade-high municipal yields enhance the relative appeal of the asset class compared to taxable fixed income, especially given their tax-exempt status, which we believe will remain intact despite political scrutiny.
Credit quality across municipals is expected to remain excellent, with more upgrades than downgrades anticipated, and revenue-backed debt likely outperforming general obligation bonds.
Issuance in 2025 is projected to reach record levels, driven by infrastructure needs and delayed projects, with transportation and public utilities leading the way. Demand remains robust, bolstered by growth in ETFs, mutual funds, and SMAs, which are expected to absorb the increased supply.
Municipals’ capital preservation and attractive risk-adjusted returns position the asset class as a core holding in fixed income portfolios, with opportunities for attractive performance despite potential market volatility.
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Emerging market debt
Emerging
market debt
Emerging market debt offers selective opportunities in 2025, with projected growth near 4% and inflation largely contained. However, potential challenges include U.S. trade policies, tariff pressures, and geopolitical risks, such as ongoing conflicts and energy market volatility.
Certain EM economies, particularly China and Mexico, may face pressure from U.S. protectionist policies, while other regions stand to benefit from lower oil prices and resilient domestic demand.
EM corporates enter the year with solid fundamentals, stronger credit metrics than developed market counterparts, and yields near 6.5%. Active management will be essential, as tight spreads require careful country and sector selection.
Despite these challenges, emerging market debt remains a favorable allocation for fixed income portfolios, offering diversification, attractive carry, and potential outperformance through a combination of top-down macro positioning and bottom-up credit analysis.
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Private credit
Private
credit
Private credit enters 2025 with optimism, supported by improving macroeconomic conditions and strong middle market lending dynamics. Deal flow is recovering after years of subdued activity, driven by Federal Reserve easing, improved economic visibility, and a business-friendly policy environment.
Borrowers have navigated rate shocks through operational efficiencies, while disciplined credit structures and tight underwriting practices have kept default rates below historical averages.
Middle market direct lending offers compelling value, with yield premiums, diversification benefits, and opportunities for capital deployment attracting investors. Robust fundamentals and favorable market conditions position private credit to potentially outperform in 2025, delivering strong yields and portfolio diversification.
As the asset class evolves, democratization through accessible fund structures will broaden its appeal, ensuring its continued relevance in a dynamic investment landscape.
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Emerging market debt
Securitized
debt
Investment
grade credit
High
yield credit
Emerging
market debt
Private
credit
Municipals