Fixed income

One chart to explain… the new fixed income paradigm

September 26, 2025 - 2 min

Fixed income investors are facing a markedly different environment to the one that characterised the decade preceding the Covid-19 pandemic.

Following the Global Financial Crisis (GFC), inflation remained low and stable due to structural forces and policy intervention. Since Covid, we’ve seen surges in inflation, then partial disinflation, but with unexpected shocks – such as Trump’s tariffs this year – adding to volatility, especially in the US and Europe.

For fixed income investors, 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% threshold¹. Today, we notice higher yields, higher volatility and higher – often positive – correlations with stocks.

And there’s one chart that encapsulates this new paradigm. It shows interest rates across various maturities, emphasising how flat the yield curve has become. What’s highlighted is how the yield curve has become more similar to the environment we were in before the GFC than the one most investors have experienced for well over a decade.

In the pre-Covid era, when rates were at – or close to – zero, fixed income managers had a couple of options to try and generate outperformance: they would either select bonds with a lower credit quality in the hopes of getting a better yield, or they could add duration – effectively, playing the term premium and rolling down the yield curve.

Today, the situation is different. A flat yield curve tends to favour short-term investing strategies because, effectively, you aren’t getting paid significantly more to take on additional term risk. When the yield curve is flat and short-term interest rates are similar to long-term rates, investors can obtain similar returns, assuming everything else is equal with a much lower level of risk (duration and volatility) by investing in shorter maturity bonds.

So, it’s a new environment for fixed income investors in 2025. And, with volatility expected to remain higher than it has been in recent years as a result of ongoing policy and macroeconomic uncertainty, it is an environment that is unlikely to change any time soon.

Written in September 2025

¹ BIS Quarterly review https://www.bis.org/publ/qtrpdf/r_qt2503c.htm

Marketing communication. This material is provided for informational purposes only and should not be construed as investment advice. Views expressed in this article as of the date indicated are subject to change and there can be no assurance that developments will transpire as may be forecasted in this article. All investing involves risk, including the risk of loss. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. Investment risk exists with equity, fixed income, and alternative investments. There is no assurance that any investment will meet its performance objectives or that losses will be avoided.

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