Keeping up with the old normal

We asked experts from DNCA, Loomis Sayles, Ostrum AM, and our Client Solutions Group for their views on how investors should be thinking about fixed income.

There has been plenty of evidence in 2025 that the investment landscape for fixed income has shifted. Central banks, especially the US Federal Reserve, have continued their transition from aggressive rate hikes post-Covid toward more measured cuts.

It’s a year that has also seen renewed concerns about fiscal stability in major economies. Elevated government borrowing in countries like Japan, the UK, and France has kept long-term yields at multi-year highs and put pressure on bond markets.

The first half of 2025 was marked by regional divergence, with the US exhibiting lower growth and rising volatility due to policy shifts like new tariffs, while Europe saw renewed fiscal stimulus – such as Germany’s €1 trillion package – pushing local yields higher.

It set the stage for a much-changed landscape in which performance was sector-dependent: US Treasuries benefited from declining yields, whereas spreads widened on riskier credit amid uncertainty.

A new paradigm for fixed income

In short, fixed income investors are facing a markedly different environment to the one that characterised the decade preceding the Covid pandemic. This means fundamentally changing the way many of us have been thinking.

Matt Eagan, Portfolio Manager and Head of Full Discretion at Boston-based Loomis Sayles, an affiliate of Natixis Investment Managers, explained: “There's a whole population of investors that have only known the market since the global financial crisis. And I think we're in the beginning stages of a new regime that people are just now getting their heads around.”

For one thing, inflation volatility has been structurally higher over the past five years. Following the Global Financial Crisis (GFC) in 2008/09, inflation remained low and stable for more than a decade due to structural forces – such as fiscal stimulus, geopolitics and energy – and policy intervention. But since Covid in 2020, we’ve seen surges in inflation, then partial disinflation, but with unexpected shocks – such as Trump tariffs this year – adding to volatility, especially in the US and Europe.

In many ways, there’s a sense of returning to the ‘old normal’ – to the decades before the GFC, where shocks were more commonplace and inflation often rose well above the 2% threshold. Volatility in bond yields and steepening yield curves certainly reflect greater inflation uncertainty.

Structural drivers and diverging central bank actions have only served to amplify the unpredictability of inflation. Meanwhile, ongoing policy and macroeconomic uncertainty – including tariffs, fiscal spending and debt sustainability – means volatility is likely to stay elevated.

Alessandro Marolda, Director at Natixis IM Client Solutions Group, said: “Comparing inflation distributions we see fatter tails – more extreme outcomes – compared to the very stable inflation period we experienced between 2009 and 2019, where inflation within major developed economies never went much above 2%.

“Then, comparing typical 10-year Treasuries, we see there are very different characteristics for fixed income investors today compared to what they faced prior to the outbreak of Covid-19. There are much higher yields, higher volatility and higher, generally positive, correlations with stocks. Overall, there are many things that today’s fixed income investors are going to have to unlearn.”

The end of US exceptionalism?

One thing to perhaps reconsider is an overreliance on the predictability of US markets. According to the midyear outlook survey of 34 market strategists from Natixis Investment Managers, ‘Treasury market turmoil’ emerged as the top risk: 85% ranked it as a medium or high concern¹.

Despite their traditional safe-haven status, investors in US Treasuries were spooked following the post–Liberation Day sell-off, sparking worries about demand for US government debt. The decline in the world’s reserve asset during an episode of elevated volatility arrived as investors were increasingly focused on the US’s growing debt burden.

Indeed, there have been a number of concerns emanating from America. As Paul Lentz, Bond Analyst at Paris-based DNCA Investments, also an affiliate of Natixis Investment Managers, pointed out: “In Europe, macro is fairly easy to read: slow but steady growth, relatively low inflation and inflation expectations, a stable labour market, and a central bank that is close to being done with its cutting cycle.

“In the US, things are not as straightforward. There are two key factors to watch: first, if the labour market continues to weaken in the context of a shrinking labour force; and second, if and when tariff-induced inflation begins to pick up, and whether the prices of other goods and services start to rise as well.”

Looking ahead to the end of the year, strategists are convinced that active management can add value to bond portfolios (68%) and many also believe that bonds can be used to generate both total return and income (44%).

There are, however, divergent views on the best way to get there: US investment grade, for example, was more popular among European strategists (54%) than their US counterparts (24%). This was in keeping with the feeling among 48% of US strategists that credit defaults in the US were likely to rise; for Europeans, just 15% felt that way.

Where to look for opportunities?

Given the sectoral dispersion we’ve seen in 2025, investors who are nimble and able to exploit differences in credit fundamentals, duration, and geography are best positioned for success. Many are overweighting resilient sectors and favouring intermediate maturities, balancing the opportunities from lower rates against persistent credit and policy risks.

Certainly, questions around the status of the US dollar as the reference currency and a risk-free asset, and the lasting impact of Trump’s tariff policy, mean fixed income investors can take flight and pursue alternatives to the US market.

“I think one of the primary strategies should be taking a global view,” commented Elisabeth Colleran, Emerging Markets Portfolio Manager at Loomis Sayles. “Since you don’t know from one hour to the next how US developments will influence capital markets, why not expand the investment opportunity set and hedge your bets broadly? Diversification could be the new flight to quality.”

The attraction of emerging markets (EM) has gathered pace over the past nine months. As Clothilde Malaussène, Senior Portfolio Manager, Emerging Debt and FX at Ostrum Asset Management, another affiliate of Natixis Investment Managers, observed: “With US growth slowing and the Fed cutting interest rates, the growth differential and the interest rate differential with the rest of the world should continue to narrow, providing less support for the dollar. US tariff policy and the great uncertainty over the final impact on US growth is also having a negative impact on the dollar.

“Official institutions, notably Asian central banks, are diversifying their assets. As for private investors, they are rotating their asset allocation from the US to Europe; they are also increasing the hedge ratio on their USD holdings, which is historically low. This de-dollarisation, if it continues, should benefit emerging currencies and all emerging assets.”

It’s not just EM that’s benefitting from a more diversified perspective. Erwan Guilloux, High yield portfolio manager at Ostrum AM, said: “The recent dynamics of the credit market are largely driven by the monetary cycle. The decrease in ECB deposit rate from 4% to 2% led to a significant decline in money market yields, driving investors to seek alternatives that still offer an attractive carry level. In this context, European High Yield fully benefits from the TINA [There Is No Alternative] rationale.

“Moreover, strong technical factors are contributing to the resilience of spreads. Inflows into the asset class have indeed been massive, mechanically supporting valuations… The structure of the market is also an edge. European High Yield is indeed dominated by BB-rated issuers, which historically have low default rates. Additionally, a relatively low duration limits sensitivity to interest rate movements, providing the market with added stability.”

DNCA’s Paul Lentz is also seeing opportunities in the sovereign bond space, including in Europe.. He commented: “The significant steepening of the curve, coupled with a building risk premium, has pushed valuations into attractive territory for the first time in years. Local currency emerging market bonds are also starting to look attractive, but the timing to enter the trade could be challenging during the second half of the year. Volatility and the curve tend to move together.

“Historically, outside of very specific episodes, the higher volatility tends to create steeper curves, which can look attractive from a carry perspective. However, as you know, higher volatility also means higher risk. Therefore, if you're interested in the dynamic of rates rather than the absolute level, you have to look at valuation from a risk-adjusted perspective to find opportunities in the fixed income market.”

All thing considered, investors have a renewed focus on credit quality and portfolio diversification. The post-Covid era’s drawdowns have not been fully recovered, weighing on sentiment and leading to a cautious approach. Active, nimble strategies – balancing quality and opportunistic allocations – are seen as essential given ongoing dispersion within sectors, regions, and credit classes.

It’s why the winning strategies in the new fixed income paradigm are likely to combine active management, a focus on income generation, and a readiness to capitalise on volatility and dispersion while staying vigilant against renewed inflation surprises. What’s more, this old normal dynamic looks set to become the new normal for the foreseeable future.

Written in September 2025