While Nuveen believes that fears of a US recession, which dominated in 2024, have receded materially, the fund manager warned that fiscal and regulatory changes under a Trump administration could present new uncertainties.
A soft landing, expected in 2025 would be characterised by slower real growth, moderating inflation and additional US Federal Reserve rate cuts.
Nuveen’s head of global fixed income, Anders Persson, noted that although valuations are stretched across most global fixed income sectors, the fundamentals and technical conditions remained strong for the year ahead.
However, investors should be alert to economic trends and employ diversified strategies in order to navigate the environment successfully.
This means being "opportunistic and flexible” in their allocation decisions, Persson emphasised.
Nuveen identified key themes to guide investment decision making next year, highlighting that the current environment offers the best starting yields in over 15 years, making this a “compelling entry point” for fixed income investors.
Moreover, elevated short- and long-term rates are expected to provide ongoing opportunities for investors. Also, positioning for bouts of volatility driven by potential policy shifts and slowing economy will remain key, according to a fund manager.
Finally, to achieve diversification and stability, investors need to balance duration with credit risk across multi-sector portfolios.
“While rates may have peaked in many – but not all – developed bond markets, the potential for healthy fixed income returns is available across sectors,’ Persson said.
“Global fixed income markets will likely take their lead from the US in 2025, with a stronger US economy and uncertainty surrounding the incoming administration’s policies setting the tone.
The manager explained that while the US economic activity has slowed, it remains solid, with real gross domestic product projected to grow slightly below 2 per cent in 2025, following the anticipated 2.5 per cent expansion in 2024 and a 3.2 per cent growth in 2023.
Meanwhile, the US labour market shows signs of a slowdown, with unemployment up around 0.7 per cent from its cyclical low, a “softening” that Nuveen expects to continue into 2025.
The incoming administration’s proposed tariffs are expected to drive prices higher, potentially triggering retaliatory tariffs from other countries and leading to an appreciation of the US dollar.
“Altogether, the net effect would likely be a medium-term drag on growth,” Nuveen said.
Other developed markets
Outside the US, Nuveen forecasts further uncertainties in 2025 that will require further liquidity and risk balancing within portfolios, given tight valuations.
“We are focused on ensuring optimal rates positioning across key markets and finding relative value among credit markets that should outperform the overall market,” the firm said.
Regarding interest rates, the manager anticipates a possible divergence in monetary policy, though the Fed will likely retain its strong influence.
While Nuveen sees “scope for more cuts” in Europe and England, Japan’s central bank is expected to continue its tightening measures.
“Though we should see differentiation among global government bonds, we remain cautious overall on duration and favour a more neutral stance,” the firm said.
Nuveen also emphasises that politics is likely to remain at the forefront as new US policy details unfold, especially around tariffs and international engagement, alongside elections across key economies such as Australia, Canada and Germany.
While the fund manager sees value in longer-dated Japanese government bonds and views Germany as a defensive allocation for sovereigns, France is expected to continue to face political uncertainties. Consequently, Nuveen remains underweight, with a short-duration stance.
However, the firm noted it may revisit this view if French spreads to German bonds widen significantly and overshoot.
“The lead-up to notable elections in Canada, Australia and Germany could mean extended periods of rate-driven volatility, and we will remain nimble,” Nuveen said.
Additionally, Nuveen expects China’s situation to hinge on the final results of potentially aggressive US tariffs. Meanwhile, Nuveen highlighted that stimulus packages for China’s economy could be felt in the developed markets for which China remains “a pace setter”.
However, the manager warned that any escalation in US–China tensions, in particular over the Philippines and Taiwan, could worsen the geopolitical climate.
