Macroeconomics

With the Fed’s stance suggesting it is prioritising growth over sticky inflation risks, volatility in longer dated bonds is likely to persist and the case for increasing duration in fixed income is not compelling.

While tariffs have done meaningful damage to the economic outlook and raised volatility in rates markets, the softening of the US stance has restored confidence in credit returns for 2025.

The question for investors now is how much of the macro risk remains, and how well that risk is being reflected in asset valuations.

Last week was one of the most volatile on record. President Trump's announcement of a 90-day pause in reciprocal tariffs for every country bar China sparked one of the largest rallies in equity indices in recent history.

With the recent economic spotlight dominated by President Trump’s rhetoric and Germany’s blockbuster fiscal expansion plans, Wednesday brought the UK back into focus with the latest round of inflation data and the Spring Statement from the Chancellor, Rachel Reeves.

Federal Reserve (Fed) chair Jerome Powell had the honour of kicking off the 2025 season for the major central banks this week, swiftly followed by the chore of having to plead the fifth every time he was asked about a President Trump policy.

Much of the discussion around inflation over the past few months has centred on the potential for US tariffs, a focus that has only intensified following Donald Trump’s inauguration.

Trade wars and geopolitical risk head a list of potential catalysts for spread widening in 2025. However, with a macro backdrop of falling rates and solid global growth, we think credit will continue to outperform government bonds and support healthy total return expectations for fixed income investors.

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.

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).

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.

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.