As global macroeconomic dynamics shift and the traditional fixed income playbook evolves, institutional investors are reassessing where risk is best rewarded.
Recent market optimism has strengthened the case for fixed income, but the pursuit of delivering outperformance in 2025 requires deliberate focus on diversification, valuation discipline, and identifying areas of structural resilience.
A compelling case for fixed income
The backdrop for fixed income entering 2025 is more attractive than in over a decade. Despite compressed spreads in several markets, yields remain compelling. Investment-grade credit in developed markets offers yields in excess of 5%, while high-yield segments are delivering yields upwards of 7%.1 We believe this presents a strong total return proposition for investors who have previously sat on the sidelines or want to diversify their equity exposure.
However, a closer look at credit spreads reveals some caution. Valuations are tight by historical standards, with spreads across both investment grade and high yield near multi-decade lows. That said, corporate earnings are holding up, and we believe this will continue in 2025.
We believe opportunities are most compelling in non-cyclical sectors and among high-quality credits lower down the capital structure, such as hybrid bonds or higher-quality high yield.
Consequently, we believe opportunities are most compelling in non-cyclical sectors and among high-quality credits lower down the capital structure, such as hybrid bonds or higher-quality high yield, where investors can be adequately compensated for additional risk.
More than just a diversifier
In contrast to the US, Asia and emerging markets are underpinned by more stable macroeconomic fundamentals. Inflation is well contained across most major markets, and policy easing cycles are already underway in economies such as India and China. We believe this provides a supportive backdrop for local currency bond markets, providing comfort to investors that they are taking a risk in markets where monetary policy is on their side.
We believe Asia’s fixed income opportunity set is broader and more sophisticated than often perceived.
Importantly, we believe Asia’s fixed income opportunity set is broader and more sophisticated than often perceived. Regional credit markets now offer significant depth and diversity – across sovereign, quasi-sovereign, and corporate issuers. Active managers with adequately resourced research teams are also beginning to include the Middle East in their Asian universe, which can add investment returns and diversity to portfolios. Meanwhile, frontier markets, particularly those with International Monetary Fund-backed reform agendas, continue to deliver outsized returns for investors willing to tolerate elevated risk.
Private credit: Extending the toolkit
Private credit has emerged as an increasingly important component of the fixed income toolkit for institutional investors. While many investors remain in the early stages of deployment, the opportunity to access additional yield through illiquidity premiums and more bespoke credit structures is gaining traction.
Private placements offer a natural starting point – extending from traditional public investment-grade credit into structures that provide yield pickup without materially increasing credit risk. Beyond this, investors are actively exploring infrastructure debt and fund financing strategies, particularly in Asia, where development financing needs align with long-term investment mandates.
Fund finance ... has become a fast-growing segment, encompassing structures backed by limited-partner commitments, general-partner capital, or underlying net asset value.
Fund finance, in particular, has become a fast-growing segment, encompassing structures backed by limited-partner commitments, general-partner capital, or underlying net asset value. These offer attractive yield enhancement opportunities with varying levels of complexity and risk, allowing investors to tailor exposures to specific return and liquidity objectives.
Final thoughts
The outlook for fixed income in 2025 is robust, but success hinges on selectivity and strategy. We believe public and private credit markets offer distinct opportunities, while Asia and emerging markets present structurally attractive alternatives to traditional developed market exposures. With volatility likely to persist and interest rate cycles diverging globally, fixed income is no longer a passive allocation – it is a space for active management, conviction, and innovation.
1 Aberdeen, Bloomberg, March 2025.
Important information
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).
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