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The View from the Bond Desk – An Occasional Series
Investors in global fixed income markets should remain alert to several key risks that could disrupt flows and valuations in the coming months. Tariff-related inflation remains a top concern, particularly in the U.S., where recent policy shifts have introduced effective tariff rates of 13–17%[1].
While businesses have absorbed some of the cost increases, the risk of a broader price reset looms, potentially complicating the Federal Reserve’s rate path. If inflation proves stickier than expected, the Fed may delay or reduce rate cuts, impacting duration-sensitive assets. Additionally, fiscal uncertainty tied to the One Big Beautiful Bill Act (OBBBA) and elevated U.S. deficits could undermine investor confidence, especially if debt servicing costs rise or fiscal discipline erodes.
Geopolitical volatility also poses a significant threat. Although recent de-escalations—such as the Israel-Iran ceasefire—have calmed markets somewhat, tensions remain high, and any reversal could trigger risk-off sentiment. In Europe, the ongoing effects of the Russia-Ukraine war and energy price instability, add layers of uncertainty. Emerging markets face their own challenges, including local currencies strengthening as the US$ weakens (so from the perspective of a consumer sitting in Bangkok, imported things are more affordable but exported things are less attractive vs substitutes), bloated debt levels (up by double figure percentages YTD in many EM economies)[2], and vulnerability to U.S. trade policy shifts.
Moreover, credit market fragility is emerging, especially in sectors like U.S. office-backed CMBS, where refinancing risks are rising due to uncertain rate trajectories.
While corporate fundamentals remain broadly healthy, margin pressures and tighter spreads suggest limited upside, making security selection critical.
What is our outlook?
Given what we observe as of August 2025, we believe inflation risk, fiscal risk, geopolitical risk and credit market fragility map like this ↓
So what?
Levels of uncertainty that have not been seen for many years and signs of slowing economic growth in major markets like the U.S., is supportive of global fixed income; indeed, demand for fixed income remains elevated and resilient. Investors appear to have decided the bond market is a ‘safe place to be’, for the moment anyway.
Investment-grade corporate bonds continue to attract strong inflows, with U.S. ETFs and mutual funds pulling in $11.6 billion between July 30 and August 6—marking the fifth-largest weekly inflow on record and the highest since late 2020 (JPMorgan).
Spreads over Treasuries have narrowed to just 0.80%, nearing levels last seen in the late 1990s.
In Europe, demand for investment-grade paper is equally strong, while junk bond issuance hit a record €23 billion in June, surpassing the previous high by €5 billion (JPMorgan). Japan is also seeing renewed interest in long-dated government bonds, with PIMCO—led by CIO Andrew Balls—turning constructive on the asset class amid a dislocated yield curve and 30-year yields trading above 3% as of May 2025.
Closer to home in Australia, APRA’s decision to phase out A$43 billion in hybrid Tier 1 capital instruments by 2032 is prompting investors to seek alternatives. These range from investment-grade bonds and private credit funds to listed investment companies (LICs) and bond ETFs. It’s a similar story in the AUD market—lower supply means that any new issues are quickly absorbed, reflecting strong demand across the credit spectrum.
In addition, central bank IR cut forecasts such as that of the RBA last week are fixed income positive.
In short, investors are engaged, active and buying any available bond liquidity.
Sources
https://www.ft.com/content/51ecaa00-c674-48d6-b2ce-eb6211e8cdd5
https://www.ft.com/content/7c6fa795-6e6e-457c-bc0e-54fbd2c5a65a
[1] https://budgetlab.yale.edu/research/state-us-tariffs-august-7-2025#
[2] Bloomberg data – Northern Trust analysis
Meet Your Expert
Gerard Walsh
Gerard leads Northern Trust’s Global Banking & Markets Client Solutions group, covering Equities, Fixed Income, FX and Securities Finance.
Meet Your Expert
Joanne Gadd
Based in Australia, Joanne Gadd currently leads as Head of Fixed Income, APAC at Northern Trust, where she oversees strategy and execution across the region.
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