In September 2024, Francois Collet, Deputy Fixed Income CIO at Paris-based DNCA, told us that he was keeping a close eye on sticky inflation, market volatility, the potential for a central bank mistake and the concern that budget deficits might be larger than previously anticipated. Much has happened since then. But has this year’s volatility spike changed conventional wisdom on fixed income investing?

In this Q&A, Francois Collet answers questions based on some of the responses to our recent survey of individual investors,¹ to see if investor’s expectations align with our experts’ perceptions of fixed income markets.

With 70% of investors that we surveyed saying the world feels unstable and they’re worried about their finances, many investors appear to be lost – indeed, almost a quarter (23%) of those surveyed say they don’t know what to do. What would you say to convince investors to stay invested?

Over the long term, being exposed to cash is the worst thing an investor can do, since real returns in cash over the long term are negative. Whether they are in Europe or the US, an investor who had remained exposed to cash for more than two decades would have obtained a negative net yield, once inflation had been taken into account. Therefore, the best way to be sure of losing money over the long term is to invest in cash. Cash is never a satisfactory long-term investment solution.

Long-term return expectations have dropped from the 12.8% above inflation recorded in 2023 to 10.7% above inflation, but even moderate expectations still present significant risk. Are you finding more opportunities in one area of the fixed income asset class than another? What are you avoiding at the moment?

Even in equities, double-digit returns will be difficult to achieve. In bonds, a double-digit return can only be exceptional, perhaps with the Fed cutting its key rates massively for a year, but this extraordinary performance would be a guarantee of lower future returns.

We are in a cycle of interest rate cuts by central banks, at a time of very high public deficits. We are therefore favouring long positions on the bond market, concentrating on the intermediary part of the curve, from 5 to 10 years, avoiding the very long end (20-30 years) linked to public deficits in most countries. Indeed, for the time being, we are avoiding the long end of sovereign debt curve until the fiscal situation improves.

We prefer an allocation to investment grade emerging market sovereign debt. Countries such as Chile, Poland and Hungary have lower debt ratios than developed countries, offer fairly good debt visibility and have fairly positive spreads compared with developed countries. On maturities of between five and ten years, the returns offered by these countries more than compensate for the risk taken.

What are your thoughts when we learn that 43% of investors are concerned about the potential for economic collapse, while another 41% are worried about prospects of a market crash?

I believe more in the possibility of an economic slowdown than a real economic crash. I do not believe in a recession similar to the one we experienced after the internet bubble in 2000, during the Global Financial Crisis in 2009 or the pandemic in 2020, because private sector debt levels are low.

However, we cannot rule out a short-lived slowdown or recession. Germany has been in a mild recession for the past two years. Despite this, the German stock market is holding up well, and although the unemployment rate has risen slightly, the economic situation is not catastrophic. In fact, the situation on the markets is quite good.

And the more investors are concerned about a market crash, the less likely it is to happen. The fact that people are worried is actually a good sign. The day when everyone is euphoric and no one thinks that the markets can go down, that's probably when we'll have to cut back a bit. For the moment, as far as we are concerned, there are no major issues.

Even as inflation nears central bank targets, few think it’s truly under control. Globally, just 41% of investors think elevated inflation is finally in the rearview mirror. What’s your view on inflation? Are there are other risks on your radar that should be more pressing for fixed income investors?

The two main risks facing investors are default – the risk of not being repaid – and inflation. Corporate default rates are low and should remain so despite the slowdown in growth. Debt levels in the private sector are well under control.

On the sovereign side, the bankruptcy of the US government is highly unlikely given its excellent credit quality. But on the other hand, a deterioration in the credit quality of the US government would result in a depreciation of the dollar and therefore more inflation in the US. Inflation is the second most important risk for bond investors, and individual investors are right to think that it may remain so. The inflationary wave [that started in 2021] is largely behind us. Nonetheless, current deficit levels run the risk of a second wave of inflation over the next few years.

While the S&P 500 continued to set new records in 2024, worries about the strength of the AI trade combined with Trump’s tariffs tantrum has led many to question their exposure to US stocks in the belief that the path forward for US equities will likely be filled with more volatility and greater dispersion. But what do you think: is the era of US exceptionalism truly over? And if so, might we see a new period of European exceptionalism?

To me, American exceptionalism is above all an exceptionalism of the US stock market, rather than of US growth. The performance of US equities is far superior to that of other stock markets. This is mainly due to technology stocks, whose gigantic power is comparable to that of governments.

When we talk about American exceptionalism in the context of growth, I think we're a little mistaken. Economic growth in the US is certainly higher than in Europe or Japan. But I think that this growth is largely linked to the migration policies put in place under the Biden administration and the 16 million immigrants during Biden's administration, which boosted the working population and potential short-term growth. A return to much more restrictive migration policies should slow growth.

I think that the growth differential between the US and the eurozone since the pandemic can be explained much more by these differences in the pace of growth of the working population than by the strong dynamism of the American consumer or by public policies that have been more efficient there.

Moreover, a slowdown in growth in the US will not automatically translate into more growth in the eurozone. In fact, it's bad news for Europeans. The European stock markets are undoubtedly lagging behind Wall Street, giving us hope that they will catch up. But the potential is moderate.

The fall in the dollar – which is pushing up the euro – and the slowdown in the US market are having a negative impact on the earnings of major European companies. Companies exporting to the United States are being penalised by the exchange rate effect. If investors' disaffection with US equities is reflected in a depreciating dollar, this is not necessarily good news for Europe.

Is the status of the dollar as the reference currency and of US Treasury bonds as safe-haven assets being called into question?

The dollar's status as a risk-free asset is being called into question, but not that of US Treasuries. Even if investors question the dollar's status as a safe-haven asset, the dollar remains and, in my view, will remain a benchmark currency, at least for the next five to ten years.

Who could take its place? I don't think the dollar can be dethroned by the euro, gold or the yuan. Even when challenged, the dollar will remain the reserve currency of most central banks. Sterling was the world's reference currency for the first part of the twentieth century but did not disappear from the reserve baskets of central banks with the end of the British Empire.

It is still an important currency in the reserve baskets of central banks, admittedly much less so than it was at the time, but it is a currency that is four to five times more important than the UK's GDP justifies in the reserves of the major international central banks. A currency's status as a benchmark can only be eroded over the very long term.

Written in June 2025