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Bond income returns potentially higher in 2025
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Confidence in US growth should sustain performance
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Asia’s economy has become increasingly challenging.
Many bond investors have been enjoying higher income returns as the average rates (coupons) being paid on bond indices has been rising since 2021 and are likely to continue to do so as lower coupon bonds issued before 2021 mature. Over the past decade, the compound income return from a typical US dollar investment-grade index has been around 4%; in Europe, it has been just over 2%. For US dollar high yield, it has been close to 6.5%. Given the rise in average coupons, income returns should potentially be higher going forward. But bond prices can be volatile. To manage this, investors may choose strategies with less price and interest rate risk – like short-duration bonds. But overall, we believe – given the broad increase in yields – that income levels are becoming more attractive. With uncertainty surrounding the economic outlook, steady income returns should not be overlooked.
Aia’s economic environment has become increasingly challenging from a growth, monetary policy, and currency perspective. US monetary policy and the greenback strength are among the main challenges, with the US trade policy as the primary threat. While inflation eased in most Asian economies in 2024, the average remains above most central bank targets. The Federal Reserve’s (Fed) policy path remains critical as it could intensify capital outflows from countries that ease rates too aggressively. Most Asian currencies have depreciated, particularly in the final three months of 2024, as expectations for fewer Fed rate cuts grew. Currencies will likely be the pressure valve for adjusting to any growth shock from tariffs, with regional correlations likely to move higher initially, before policy choices, and relative budgetary space in various economies, help differentiate the strong from the vulnerable.
Also read: Janus Henderson Launches Fixed Interest Active ETF
AXA Investment Managers has identified six themes, supported by megatrends, that companies are tapping into which we believe are best placed to navigate the evolving global economy: Technology & Automation, Connected Consumer, Ageing & Lifestyle, Social Prosperity, Energy Transition, Biodiversity.
