Fixed Income Perspectives Q4 2025
Our latest bond markets insights to help shape portfolios.
Fixed Income Perspectives outlines the current macro and market views from across Capital Group’s extensive fixed income team and offers insights on investors’ bond exposure against an ever-changing backdrop.
In our Q4 2025 update, we discuss:
- Global growth is expected to moderate but remain positive through 2026. The global economy is navigating a complex transition and possible growth convergence, especially between the US and Europe.
- The Federal Reserve has pivoted to cutting interest rates as softening labour market data take priority over inflation.
- Valuations across fixed income sectors appear tight relative to history, while fundamentals and technicals remain supported by the policy and growth backdrop. We are focused on building resilience and balance in our portfolios while also positioning for a further steepening of the yield curve.
The Federal Reserve (Fed) resumed its ratecutting cycle in the third quarter, spurring a broader market rally. While economic data generally surpassed expectations during the quarter, softening labour market data contributed to the Fed’s first policy cut in Interest rates in the US fell, while credit spreads tightened and equities gained. Meanwhile, gold surged 16.6% as some investors sought safe havens, reflecting underlying concerns about inflation, US labour market softness and geopolitical tensions.
From a macro perspective, the Fed’s interest rate cut appeared more focused on the labour market than renewed inflationary pressures. Labour market indicators appear to be softening, and job growth is below the threshold needed to maintain current unemployment levels. At the same time, inflation remains above target, with core personal consumption expenditure (PCE) around 2.9%. The Fed has indicated a desire to respond to further challenges to the labour market, and we expect additional rate cuts in the quarters ahead. We view current market pricing of a terminal rate of around 3% to be reasonable for this cutting cycle.
We expect global growth to slow for the remainder of 2025, with a potential reacceleration in 2026. The US remains central to this narrative, balancing structural resilience with evolving risks. At the same time, we believe that the prospects for growth in Europe have improved and that the outlook for economic activity in China has stabilised.
In the US, we expect growth to decelerate, while inflation may trend higher as the impact of trade policy continues to feed through to consumer and producer prices. While most companies have been slow to pass on tariff costs, anecdotal evidence suggests that this dynamic may shift, amplifying inflation and dampening consumer spending in early 2026. Still, ongoing fiscal support and potential sustained investment and productivity driven by AI capex may offset these headwinds, which could help growth momentum endure into next year.
