As the second quarter of 2025 unfolds, fixed income investors find themselves at a crossroads. The global macroeconomic backdrop is marked by diverging central bank policies, persistent inflationary pressures, and pockets of economic resilience. In its latest Fixed Income Perspectives, Principal Asset Management offers a thoughtful roadmap to help investors navigate this complex environment.
A World of Diverging Central Banks
One of the most striking themes in Principal’s Q2 outlook is the policy divergence among global central banks. While the Federal Reserve remains cautious, waiting for further signs of inflation moderation before acting decisively, some emerging market central banks have already begun easing.
For investors, this divergence underscores the importance of active duration management and global diversification. Markets are increasingly sensitive to policy signals, and managing interest rate exposure will be key to mitigating volatility.
Inflation: Still Sticky
Although global inflation has moderated from its 2022–2023 highs, certain core components remain sticky — particularly in services and labor markets. Principal sees this as a signal that the rate normalization process will likely be gradual, especially in developed markets.
Where the Opportunities Lie
Principal remains constructive on several areas of the market:
-
Credit markets: Investment-grade and high-yield corporates continue to benefit from resilient earnings. Careful credit selection and active risk monitoring are essential.
-
Securitized assets: In structured credit, agency MBS and selected non-agency deals offer relative value and potential income streams backed by solid fundamentals.
-
Global bonds: With currency volatility moderating and yield differentials widening, select non-U.S. government bonds present opportunities for enhanced diversification.
A Time for Precision
Principal Asset Management advocates a measured, high-conviction approach to fixed income in Q2 2025. With inflation still elevated and rate paths diverging globally, a combination of duration flexibility, credit selectivity, and geographic breadth may help investors generate income while managing risk.