All insights

Will volatility in government bonds continue? Has fixed income seen “peak ESG”? And what will be the biggest driver of returns?

Global rates markets rallied sharply on Wednesday after fixed income investors received some long-awaited good news in the shape of Consumer Price Index (CPI) data for December, which came in below consensus in both the US and the UK.

Given modest interest rate cut projections, a stable if not stellar macro backdrop and better relative value than corporate credit, we think European ABS investors can expect another strong year of supply and returns in 2025.

Last week Fitch Ratings published a report concerning asset performance deterioration in UK residential mortgage-backed securities (RMBS) originated prior to the global financial crisis (GFC).

The latest non-farm payrolls (NFP) data on Friday showed ongoing resilience in the US labour market. To quote the president of the Federal Reserve Bank of Chicago, Austan Goolsbee, “the labor market seems to be stabilizing at something close to a full employment rate.” Is he right?

Last week’s rise in UK government bond yields prompted the bonds of UK financial institutions, both banks and insurers, to underperform other regions, a trend also seen in the equity market.

The Net Zero Banking Alliance (NZBA) has been the flagship climate initiative for banks to advertise their commitment to aligning their investment and lending portfolios with net-zero targets by 2050 or sooner. However, in recent weeks the NZBA has been hit with the withdrawal of all its major Wall Street banks.

We saw a sell-off across the UK Gilt curve on Wednesday with yields rising by 4bp at the short end and 11bp at the long end. This took the 10-year Gilt to 4.80% and the 30-year Gilt to 5.35%, with the latter bringing the unwelcome headline that UK borrowing costs are at their highest since the last century.

It has been a busy start to 2025 in fixed income markets. After the Federal Reserve’s (Fed) hawkish December dot plot, which added fuel to a sell-off in rates last month, you might have thought primary market activity would be more cautious than both issuers and investors would have anticipated a month ago.

Primary market and trading activity may be declining as is typical in late December, but macro data doesn’t sleep, and central banks haven’t got the memo on the wind-down into year-end either with policy meetings at the Federal Reserve (Fed) and the Bank of England (BoE) scheduled for Wednesday and Thursday respectively.

Spread tightening has left some market participants nervous about fixed income valuations going into 2025, but we think the drivers of recent credit performance are unlikely to weaken materially in the coming months.

With analysts steadily publishing their projections for 2025 (ours are here), the macro variables that tend to get the spotlight are naturally growth and inflation.