1. Trump concerns likely well priced in now…

Perhaps the most dominant factor affecting global bond markets in recent weeks has been Donald Trump’s second US presidency. Markets are concerned that increased import tariffs, tighter immigration controls, and pro-growth spending might lead to higher US inflation. In turn, this has led to a significant paring back of US interest rate-cut expectations and elevated US Treasury yields.

Ten-year Treasury yields moved back towards their October 2023 high of above 5.0%, detracting from bond returns, including investment grade (IG) bonds. However, the magnitude of yield rises means Trump-related risks are now probably priced in.

2. …and some potential Trump positives too

Much of the focus has been on the potential inflationary impact of Trump’s policies. However, there are also potential upside factors. Firstly, Trump’s expected pro-growth, lower taxes and deregulation policies should boost US economic growth and corporate earnings, helping corporate bond performance. Secondly, investors would likely respond favourably if Trump makes real progress on the Israel/Palestine and Russia/Ukraine conflicts.

3. Attractive all-in yields

All-in IG bonds yields have risen significantly. This has improved the attractiveness of the asset class from both an income and valuation perspective. The current global IG index bond yield of 4.8% is well above the 10-year average of 3.1% (Chart 1). Higher yields improve the valuation of IG bonds compared to other risk assets too, including equities – for example, the current global IG yield of 4.8% is now well above the S&P 500 earnings yield of 3.3% [1]. 

4. Relative safety benefits of IG bonds

IG bonds’ structural features can make them less risky than other assets. Compared to equities, they are higher up the capital structure and usually provide more consistent cash flows, making their returns less volatile and more secure. Of course, on the flip side, there’s lower upside potential. However, following the S&P 500’s two consecutive years of 25%+ returns, equity valuations are expensive. We could therefore see investors rotate into less risky assets, such as IG bonds. 

IG bonds also offer a degree of resilience in weaker economic conditions. Many are backed by the earnings of highly rated, secure companies with strong balance sheets. In addition, IG bonds also get some downside protection from their yields being responsive to treasury yield changes, which usually go down in periods of weaker growth and/or increased investor risk aversion.  

5. Good corporate fundamentals

Furthermore, IG corporate bonds’ secure cash flows are linked to key financial fundamentals, which are currently strong and supportive. This includes favourable indicators such as modest net leverage, ample interest coverage and strong profit margins. In the US, aggregate (post-tax) corporate profits are still near record highs (Chart 2).

6. Interest rate-cutting environment

Historically, interest rate-cutting environments tend to be good for IG bonds. This is because Treasury yields usually fall in response to rate cuts, boosting returns. That said, highly unusually, this has not  been the case in the US on this occasion. The US Federal Reserve (Fed) started its rate-cutting cutting cycle in June 2024, but Treasury yields have since risen. While part of this may be owing to Trump inflation concerns, ultimately, we think the more normal pattern should assert itself over time.

The situation is less abnormal in Europe. Bund yields which, while influenced by Treasury yields, are still lower than when the European Central Bank (ECB) started reducing rates on 6 June 2024. Unlike the US, markets have also not pared back European rate-cut expectations, with the ECB expected to deliver around 100bps of cuts in 2025.  

7. Likely inflows from money market funds

The Fed increased interest rates from 0-0.25% in early 2022 to 5.25%-5.50% by mid-2023, helping to attract huge inflows into money market funds. By the end of Q3 2024, total US money market fund assets reached US$6.8 trillion, up from US$1.6 trillion at the end of 2022. However, cash rates are now falling in line with lower interest rates. As such, we think the huge cash reserves parked on the sidelines could start moving into risk assets, especially relatively secure IG bonds.

8.  Moderate growth usually the ‘sweetspot’ for IG credit

Historically, rather than high economic growth periods, it has actually been periods of moderate economic growth in the range of 1-3%, when the best IG bond returns have been seen on average [2]. And moderate growth of 2.0% and 1.1% respectively in the two biggest IG bond issuing regions of the US and Europe, is what our economists are forecasting in 2025 [3].