Gov Sovereigns/Treasurys

With economic headwinds building and fiscal dynamics shifting, bond markets are at a turning point. Our latest note outlines why German bund yields are set to decline and why UK gilts are poised to outperform — and how to position accordingly.

This morning’s weak consumer spending and strong inflation data reinforce our sense that the US economy is heading toward recession.

In this Second Quarter Strategy Outlook, we explore the major trends that are set to drive financial markets for the rest of 2025 and beyond.

This report is a quick take on our views on UK bonds and FX, given the recent budget.

An analysis of historical data shows that Ba-rated bonds outperform other corporate credit tiers in the long-run on a risk-adjusted basis. That said, today’s fragile macro environment warrants a more cautious allocation. 

The market reaction to this afternoon’s Fed meeting looks overdone. Investors could be in for a hawkish surprise when it becomes apparent that the Fed won’t ease policy into higher tariff-driven inflation prints.

A falling stock market and sticky bond yields represent the worst of both worlds for investors. We interrogate why bond yields haven’t dropped more given the large selloff seen in equities.

We attempt to model the term premium in this report with inflation uncertainty, the stock-bond correlation, and “Private Treasury Absorption.” Using our model, we estimate the fair value for the US term premium is 89 basis points above the current level. We also find that fiscal concerns are overrated as a term premium driver and instead, the hedging properties of bonds are more important. Over the cyclical horizon, we continue to recommend an above benchmark duration, given our expectations of an economic slowdown. However, if our term premium estimates are correct, US Treasuries still do not have a high enough risk premia to warrant a large structural allocation in a multi-asset portfolio.

Our Portfolio Allocation Summary for March 2025.