In fixed income, priority is given to government bonds

The escalating geopolitical picture with the Iran-Israel war and the US further raises the global risk bar and the search for protection. With rising tensions in the Middle East and rising energy costs, we expect inflationary pressures in the short term. Higher energy prices act as a tax on growth, creating a possible divergence between core and non-core inflation. This could push central banks to ignore rising inflation while growth slows due to the supply-side shock. The longer Brent remains at elevated levels, the greater the risks for global growth and inflation. As a result, volatility is likely to persist in energy markets, trade routes and global bond assets. That said, Brent remains below post-Liberation Day peaks (in non-dollar currencies). Curiously, despite geopolitical tensions, there are no strong movements towards safe haven assets in bond markets, a sign that inflationary fears prevail over geopolitical ones. These are the indications coming from Andrew Chorlton, Chief Investment Officer, Fixed Income at M&G

There is no real substitute for US Treasury bonds, given their enormous scope and liquidity. Despite the sharp increase in debt levels, Treasuries continue to play a key role in bond portfolios, even in an environment of uncertain market dynamics. Looking ahead, the bond market should play a greater role in shaping government policy, potentially reinforcing fiscal discipline. Any deviation from such discipline could translate into higher yields, especially if fiscal spending expands. The transition from an era of low inflation and low interest rates implies a more volatile environment, in which investors' adaptability will be crucial.

There are several risk factors that make it difficult to make predictions, but it is reasonable to say that the ECB is nearing the end of its cut cycle. In the last 12 months it has cut rates by 200 basis points to 2%, and the market already expects a further cut of 25 points. This comes against a backdrop of subdued inflation, unlike in the US and the UK, where inflation is higher and persistent, despite cuts of 100 basis points. If the economic situation were to deteriorate significantly, the other major central banks could also intervene. Although this may put downward pressure on European yields, it is unlikely to substantially alter ECB policy. Europe should benefit from the strong fiscal impulse expected, particularly from Germany, which will invest in infrastructure and defence, along with other countries aiming for new defence spending targets of between 3% and 5%. This dynamic, although medium-term, could support GDP growth and inflation, counteracting the decline in the deposit rate. At the same time, the global sovereign bond supply is growing. With Western governments continuing to issue debt, the dispersion between the curves (US, Eurozone, China) offers many opportunities

Our positioning varies depending on the strategy, but in general we are neutral or underweight credit. The guiding thread of our approach is value orientation and, given current valuations and macro uncertainty, we have preferred to maintain a selective approach, favouring higher quality securities and remaining cautious about adding risk until remuneration improves.

Emerging bonds continue to play an important role in diversified portfolios, particularly in the context of rising geopolitical tensions and uncertainty regarding the direction of US policy. Since the beginning of the year, sovereign debt in local currencies has been among the best performers, while hard currency spreads have narrowed considerably after widening in early 2025, particularly on Liberation Day. This performance reflects improved macro fundamentals, increased policy credibility in many emerging markets and growing investor confidence. Debt here also offers diversification in terms of credit quality and economic drivers, making it possible to reduce reliance on US-related risk and take advantage of geography-specific opportunities.