Fixed income

Uncertainty will reign: 2025 outlook with DNCA

December 17, 2024 - 3 min read

Daniel Claringbull, Global Product Manager, DNCA Investments

What are the macroeconomic factors you will be monitoring in 2025?

As always, when we perform macroeconomic analysis, we do so through the lens of four main pillars. These are of course: growth, inflation, monetary policy, and fiscal policy.

In 2025, growth evolution will be very much a key figure that plays out over the year. This in our minds will be the main driver of market sentiment moving forward. From an inflation standpoint, a new uptick in inflation could equally be a driver for fixed income markets. We can't forget that inflation has fallen principally through a drop in prices on energy markets and consumer goods. Positive immigration has also helped in its way by easing labour markets. Future actions that could be implemented by the incoming administration in the US could slow or even reduce this trend. The main question will be by how far and how strongly the President-elect wishes to push his main campaign themes. In the short term, the United States/Europe divergence will drive markets. Market euphoria from the election in the US should continue into the first half of 2025, and this will push immediate risk to growth into the second half of the year.

In Europe, this risk is much more in the short term, can Germany change economic policies following on from the elections? Will we see continued political risk in France? Finally, we predict that uncertainty will reign in 2025. He who says uncertainty says more volatility. With higher volatility, we should see lower term pricing and hence less clear entry points on fixed income curves.

Will we see a shift from equities to bonds?

In the United States, this situation should most likely continue into 2025. Equity yields will continue to be lower than bonds. As portfolios are rebalanced on a monthly or quarterly basis, we should see a shift from equities to bonds in the beginning of 2025.

In Europe, negative outlooks have already been priced into the markets. We can see this through the very low comparables between Europe and the United States today. Inversely in the United States, the majority of positive scenarios have also been baked into prices in the markets. Hence, we should be looking at these two factors very closely in the beginning of 2025.

What is your outlook for fixed income in early 2025?

The outlook for 2025 remains noisy and without true direction, risk premiums on longer term sovereign debt should remain under pressure, and central bank easening will continue to steepen swap curves. This continued pressure on longer parts of the curve won't necessarily offer investors the return they are seeking. In the end, 2025 should remain a lackluster year for fixed income on longer parts of the curve in some G 10 markets.

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