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Diverse Solutions in Fixed Income: 9 key takeaways from our webinar
5 March 2025
Fixed income assets face a range of opportunities and challenges in 2025 including trade tariffs, immigration issues and geopolitical concerns.
Our latest webinar discussed these factors and talked about the diverse solutions for clients invested in fixed income. Ben Gutteridge, Portfolio Manager, Multi-Asset Strategies, was joined by Michael Matthews, Co-Head of IFI Europe and fixed income fund managers, Stuart Edwards and Alexandra Ivanova.
Read our key takeaways for the highlights and watch the webinar replay to see the full conversation.
1. Value in the Investment grade bond market
Michael Matthews, Co-Head of Invesco Fixed Income said the challenge we have is that spreads are tight for investment grade market. In February, the current spread for yields was 92 basis points. An investment grade market with a spread under 100 basis points has got to be considered expensive by historic comparison. Yields are quite attractive, but they come more through a risk-free rate rather than good credit spreads. In his view it makes sense to be defensive.
Source: Macrobond, 19 February 2025
2. A cautious approach is recommended when managing credit exposure due to tight valuations
Stuart Edwards, fund manager of Invesco Tactical Bond Fund (UK) explained that credit exposure can be used as a significant component of his portfolio due to its flexible nature, though the fund's credit exposure has decreased significantly over the past 2-3 years. Current valuations are not compelling, with many investors focusing on outright yields without considering credit spreads. In our view, there are attractive opportunities in shorter-duration securities.
3. Government bonds are becoming an important hedge against a broader mix of assets
Edwards noted that while yields appear attractive from a long-term perspective, the bond market is transitioning to play a more balanced role in portfolios. With persistent inflation in the US and UK, government bonds are becoming a hedge against a broader mix of assets, including equities. Recent survey evidence from the US has shown warning signs around confidence, with weak consumer sentiment surveys. If this impacts labour market data, government bonds could be a favourable place to be.
4. Now could be an opportunity to add some duration to portfolios
Matthews believes we are currently in a higher rate environment; we think adding some duration to a portfolio makes sense. Some of the duration we have in the Invesco Corporate Bond Fund (UK) is through gilts, rather than credit. We should be cautious but optimistic about duration.
5. Globally, yields and government bonds are beginning to provide diversification from risk assets
Ivanova highlighted that yield levels across the globe are becoming increasingly attractive, with government bonds providing valuable diversification from riskier assets. We have been actively responding to higher yield levels, finding more value in the long end of the yield curve in the US after repricing in response to Trump trade tariffs and fiscal fears. In Europe, there’s a notable focus on defence spending and fiscal expansion, making it crucial to rotate and be selective with duration. This strategic approach underscores the importance of adapting to market conditions to optimise returns.
6. Further rate cuts by the BoE could be beneficial for bonds,
Whilst inflation has been sticky, services inflation is moving in a positive direction. The Bank of England (BoE) is focused on reducing inflation but is expected to cut rates two or three times, bringing the base rate to 3.8% in a year. This would bring it to the range that is considered to be neutral. If downside growth risks materialise, there could be additional cuts to inflation.
For the bond market, opportunities exist in the short end or the belly of the curve, while the long end requires consideration of additional factors, such as the willingness of investors to take down supply. The gilt market presents opportunities to re-engage and take on some risk. Matthews added that further rate cuts by the BoE could be beneficial for bonds, similar to the demand seen for European Credit when the European Central Bank (ECB) cut rates.
7. Trump’s policies on bond markets spark cautious optimism
Trump's policies, including tariff risks and tax cuts, initially caused the US dollar to strengthen and equity markets to rise. This knocked some confidence in the bond markets, steepening the yield curve. Over time, some of these changes have reversed slightly, reflecting policy uncertainty. It's unclear if tariff risks are for negotiation or structural realignment.
8. US exceptionalism is beginning to fray
Ivanova’s response to the increasing uncertainty of the proposed policies, is to be attuned to the marketplace. Interestingly, Stuart discussed the idea that US exceptionalism is beginning to fray, due to tight monetary policy. US exceptionalism was driven by US equities, notably due to the success of the ‘Magnificent 7’, however this is being challenged by global competitiveness.
9. Opportunities in emerging markets debt
In our view, emerging market debt is currently attractive as the US dollar has weakened since late 2024, creating opportunities. Given the retracement, it has created an opportunity for emerging markets. Attractive valuations have led to investments in Mexican and South African government bonds. From our perspective emerging markets offer good diversification with attractive yields and stable fundamentals.
We have a broad range of fixed income capabilities including active, passive, mainstream, and innovative solutions.
FAQs
Whether you’re looking for income, diversification, capital preservation or total returns, our global fixed income teams have the strategies, the scale and the flexibility needed to match your objectives as markets evolve.
We have more than 200 fixed income specialists who invest across regions, investment styles and capital structures. Their expertise spans the entire fixed income spectrum, covering credit, rates and currencies.
- $313.72 billion in fixed income assets under management
- 45+ years investing in fixed income markets
Source: Invesco as of 31 December 2022.
Fixed income investments can offer several important benefits to investors:
- Diversification: Adding fixed income securities to a portfolio can help diversify it and reduce its overall risk, as bonds typically behave differently to other investment instruments like equities.
- Risk reduction: Fixed income investments are deemed less risky than stocks, as the issuer is contractually obliged to meet the income payments and repay the principal sum on the redemption date. In the event of bankruptcy, fixed income instruments also sit higher up the capital structure than equities. This means that the issuer will meet its debt obligations before looking after its shareholders.
- Liquidity: Many fixed income securities are highly liquid and can be easily bought and sold in the market.
While fixed income securities are deemed less risky than equities, there are still some key things to look out for:
- Interest rate risk: When interest rates go up, bond prices go down. This is because, in the new higher rate environment, new bonds will be issued on more attractive terms. As such, investors looking to sell their existing bonds will need to do so at a discount in order to compete.
- Inflation risk: When investors buy a bond, they commit to tying their money up for a set period of time. If inflation is high or rises during the lifetime of the loan, its value will be eroded and their money will have less purchasing power when it is repaid on the redemption date. Inflation also erodes the purchasing power of the income earned.
- Credit risk: When you invest in a business or government, there is always a risk that they will go bankrupt and fail to repay the loan. Furthermore, if they run into difficulties, they may struggle to meet interest payments and default on their obligations. Fixed income investors should carry out thorough credit analysis before buying a bond to make sure the issuer is financially sound.
- Market risk: If an investor is unable to hold a bond until maturity and needs to sell it on the secondary market, price fluctuations resulting from the overall performance of financial markets could lead to losses.
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19 February 2025
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Investment risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.
Invesco Tactical Bond Fund (UK)
The debt securities that the Fund invests in may not always make interest and other payments and nor is the solvency of the issuers guaranteed. Market conditions, such as a decrease in market liquidity, may mean that the Fund may not be able to buy or sell debt securities at their true value. These risks increase where the Fund invests in high yield, or lower credit quality, bonds. The Fund has the ability to make significant use of financial derivatives (complex instruments) which may result in the Fund being leveraged and can result in large fluctuations in the value of the Fund. Leverage on certain types of transactions including derivatives may impair the Fund’s liquidity, cause it to liquidate positions at unfavourable times or otherwise cause the Fund not to achieve its intended objective. Leverage occurs when the economic exposure created by the use of derivatives is greater than the amount invested resulting in the Fund being exposed to a greater loss than the initial investment. As the Fund has wide discretion to dynamically allocate across the debt securities spectrum and between that asset class and cash, the risks relevant to the Fund will fluctuate over time, which may result in periodic changes to the Fund’s risk profile. The Fund may invest in contingent convertible bonds which may result in significant risk of capital loss based on certain trigger events. The Fund’s performance may be adversely affected by variations in interest rates. The Fund has the ability to invest more than 35% of the value in Government and public securities issued or guaranteed by a single body.
Invesco Global Income Fund (UK)
The debt securities that the Fund invests in may not always make interest and other payments and nor is the solvency of the issuers guaranteed. Market conditions, such as a decrease in market liquidity, may mean that the Fund may not be able to buy or sell debt securities at their true value. These risks increase where the Fund invests in high yield, or lower credit quality, bonds. The Fund has the ability to make use of financial derivatives (complex instruments) which may result in the Fund being leveraged and can result in large fluctuations in the value of the Fund. Leverage on certain types of transactions including derivatives may impair the Fund’s liquidity, cause it to liquidate positions at unfavourable times or otherwise cause the Fund not to achieve its intended objective. Leverage occurs when the economic exposure created by the use of derivatives is greater than the amount invested resulting in the Fund being exposed to a greater loss than the initial investment. As the Fund has wide discretion to dynamically allocate across the debt securities spectrum and between that asset class and currencies, the risks relevant to the Fund will fluctuate over time, which may result in periodic changes to the Fund’s risk profile. As one of the key objectives of the Fund is to provide income, the ongoing charge is taken from capital rather than income. This can erode capital and reduce the potential for capital growth. The Fund may invest in contingent convertible bonds which may result in significant risk of capital loss based on certain trigger events. The Fund’s performance may be adversely affected by variations in interest rates.
Invesco Corporate Bond Fund (UK)
The Fund is theme-based or invests in a specific sector or a small number of sectors and/or industries. Investors should be prepared to accept a higher degree of risk than for a Fund that is more widely diversified across different sectors/industries. The debt securities that the Fund invests in may not always make interest and other payments and nor is the solvency of the issuers guaranteed. Market conditions, such as a decrease in market liquidity, may mean that the Fund may not be able to buy or sell debt securities at their true value. The Fund has the ability to make use of financial derivatives (complex instruments) which may result in the Fund being leveraged and can result in large fluctuations in the value of the Fund. Leverage on certain types of transactions including derivatives may impair the Fund’s liquidity, cause it to liquidate positions at unfavourable times or otherwise cause the Fund not to achieve its intended objective. Leverage occurs when the economic exposure created by the use of derivatives is greater than the amount invested resulting in the Fund being exposed to a greater loss than the initial investment. The Fund may invest in contingent convertible bonds which may result in significant risk of capital loss based on certain trigger events. The Fund’s performance may be adversely affected by variations in interest rates.
Important information
Data as at 26 February 2025, unless otherwise stated.
This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.
Views and opinions are based on current market conditions and are subject to change.
For the most up to date information on our funds, please refer to the relevant fund and share class-specific Key Investor Information Documents, the Supplementary Information Document, the financial reports and the Prospectus, which are available using the contact details shown.
EMEA4286067/2025
