The world's equilibria have been turned upside down in the space of a few weeks. The United States has set the pace for protectionist measures through new customs barriers imposed on Canada, Mexico and China, while at the same time having paved the way for a disengagement in the geopolitical arena: an end to support for Ukraine and, by extension, a questioning of American positions within international alliances.
The impact of the trade war is likely to result in a sharper-than-expected slowdown in US growth - with higher consumer prices, higher production costs in the US and lower exports curbing GDP growth - and globally.
In these conditions and given the signs of stagflation in the US, the Fed is maintaining a cautious stance. With core inflation still well above target, we expect the Fed to make two rate cuts this year, followed by one in 2026, to reach a terminal level close to 3.5%. In the eurozone, the trajectory is different, with "a disinflation process well under way" according to the ECB, which lowered its key rates again to 2.5% on 6 March. Mindful of the risks to economic activity, which remain bearish in the short term despite the long-term outlook for public investment, the ECB will probably cut rates back to 2% by September.
On the bond markets, interest rates have quickly incorporated the forthcoming rise in public spending. As a result, we expect them to remain volatile with no marked trend in the short to medium term. As a result, we believe that a high degree of flexibility is required when managing bond portfolios.
Portfolio, diversification and selectivity of securities
"Absolute return" bond management can help diversify performance drivers. Without the constraint of benchmarking to a bond index, this approach explores a broad universe: corporate bonds, government securities, convertible bonds, derivatives in particular.
In terms of investment strategy, the carry of government bonds - holding them to maturity - still looks attractive. Investment grade corporate bonds also retain solid fundamentalsin our view, in a weaker growth environment. These stocks still appear to offer potential risk-adjusted returns, with protective credit spreads.
In sector terms, financials remain a key segment in our view. We target bank issuers with sound fundamentals: high levels of profitability, low default rates. We like the most senior debt - i.e. where repayment to creditors has priority in the event of default - issued by local subsidiaries of major European banking groups, established in peripheral countries. Finally, carrying high-beta securities, which are likely to fluctuate more than the market as a whole, can offer additional yield.
In short, a "return to basics" to face the challenges of the fixed-income markets.
Editing completed on 10/03/2025
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Cautionary statement
The opinions expressed (i) are considered reliable by LBP AM and well-founded or justified in light of the economic, and (ii) are provided for information purposes only. Accordingly, they do not constitute an offer to buy or sell a security, investment advice or financial analysis. Past performance is no guarantee of future performance. The opinions expressed correspond to the convictions of the management team. Neither LBP AM nor LFDE may be held liable for them under any circumstances.