The global economy is recording a stabilisation, yet contradictory factors are simultaneously influencing growth, inflation, and interest rate developments. This is the assessment of Peter Becker, Fixed Income Investment Director at Capital Group. Supporting factors include robust growth in artificial intelligence, increasing productivity, and positive economic data from the United States. These are contrasted by ongoing geopolitical uncertainties, elevated inflation levels, and regionally divergent developments.
In particular, the conflict between the USA and Iran continues to cause geopolitical volatility. Investors are also observing the rising debt levels of key industrialised nations with concern. Inflation fears and a reassessment of US monetary policy led to an increase in Treasury yields, with ten-year US government bonds currently yielding over 5 per cent. However, these higher yields also reflect increased growth expectations and a greater capital requirement to finance long-term investment themes such as artificial intelligence, energy, and defence. Peter Becker stresses that despite global growth stabilisation, geopolitical risks, particularly the progression of the US-Iran conflict, must be regarded as potential triggers for volatility. He emphasises the need to keep an eye on fundamental growth drivers, such as extensive investments in artificial intelligence, in addition to these risks.
Regional Divergences and US Resilience
The United States economy proved more resilient than predicted. Positive developments in employment and consumption, combined with high investments in artificial intelligence and increasing corporate productivity, support the economy. However, weaknesses are discernible: wage growth has slowed, inflation remains elevated, and declining savings rates are reducing consumers' financial leeway. Peter Becker points out that further consumer development, particularly under pressure from real incomes and shrinking financial buffers, will be crucial.
Outside the USA, a divergent picture is emerging. Europe is experiencing only moderate growth, while inflationary pressure is expanding to the services sector, which will likely require further measures from the European Central Bank. In China, initial signs of stabilisation are evident among companies and households, and the burdens from the real estate sector have eased; however, a broad recovery in real estate prices is yet to materialise. Japan faces the challenge of rising inflation amid fragile growth. Becker summarises that the global economy is not stabilising everywhere at the same pace, and regional differences as well as the demands on investor positioning remain significant.
Implications for Bond Markets
For bond investors, the situation is ambivalent. Many fixed income segments exhibit historically demanding valuations. Nevertheless, the increased yields significantly improve the initial conditions for future returns. Peter Becker explains that higher starting yields create a solid basis for future returns, and investors are now being compensated again for holding bonds after a period of exceptionally low interest rates. Given the currently tight valuations, he recommends a defensive positioning, a focus on high quality, and broad diversification.
In corporate bonds, robust US economic data supports solid fundamentals, but valuations are now demanding. Therefore, according to Becker, selective individual bond selection – in both the investment-grade and high-yield segments – is crucial. For US government bonds, he favours targeted positioning along the yield curve. While he exercises caution at the long end due to government debt and potential term premiums, he sees greater potential in medium maturities. Becker expects that medium maturities could benefit if the Federal Reserve raises interest rates less sharply than currently priced in.
While the stabilisation of the global economy improves the environment for bonds, it does not eliminate existing risks. Geopolitical uncertainties, elevated inflation, regional divergences, and a US monetary policy that is harder to assess can continue to cause volatility. At the same time, the higher starting yields offer a more stable basis for future returns and have repositioned the role of fixed income securities as a source of income for investors. It is therefore important for investors to combine return potential and resilience through a conservative, diversified, and high-quality approach, as well as greater selectivity in credit risks.
