Emmanuel Petit, General Partner, Head of Fixed Income; Julien Boy, Fixed Income Portfolio Manager Specialisation: Govies & Inflation et Samuel Gruen, Fixed Income Portfolio Manager Specialisation: Relative Value Rothschild & Co Asset Management.
While equity markets continue to grab the spotlight, fixed-income markets are entering a pivotal phase marked by diverging monetary policies and growing economic and political risks. In its October 2025 Fixed Income Quarterly Strategy, Rothschild & Co paints a nuanced picture: the United States is mired in uncertainty, while Europe shows early signs of revival.
Monetary Policies Out of Sync
Major central banks are now moving at different speeds. In the United States, the Federal Reserve resumed its rate-cutting cycle in September after nine months of pause, with two additional cuts expected before year-end. The institution faces a delicate balancing act between fighting inflation—still above the 2% target—and supporting employment, as the jobless rate has climbed from 3.4% to 4.3% over the past year.
However, the Trump administration’s economic policy has added confusion. The fiscal package known as the “One Big Beautiful Bill”—whose effects are expected to materialize in 2026—could stimulate business investment but weigh on household consumption as import prices rise. On top of this, a budget shutdown has paralyzed parts of the federal administration and suspended key economic data releases, making it harder to gauge the real health of the economy.
In Europe, the European Central Bank (ECB) has officially ended its monetary easing cycle. With inflation stabilizing around its 2% target, the ECB can afford to take a wait-and-see approach. Hopes for recovery rest on Germany’s fiscal plan, which could boost growth by 0.4% in 2026 and up to 0.8% by 2029. Still, uncertainty lingers—particularly in France, where the OAT-Bund spread exceeded 85 basis points in early October, signaling renewed political risk ahead of the 2027 presidential election.
Weak Signals in the Credit Market
Recent bankruptcies—such as Braskem in Brazil’s chemical sector and First Brands in the U.S.—have exposed vulnerabilities in the high-yield and private debt segments. Investors are becoming more selective, shunning the riskiest B- and CCC-rated issuers and cyclical industries such as chemicals.
While investment-grade bonds continue to offer attractive carry, strains in the U.S. regional banking system—highlighted by Zion Bancorp’s $50 million loss linked to commercial real estate fraud—underscore the need for caution. So far, contagion risks appear limited thanks to solid market fundamentals and greater transparency in the credit space.
Agility and Selectivity: The Keys to Fixed-Income Management
In such an environment, management flexibility is essential. Rothschild & Co continues to favor European investment-grade credit—especially bonds with three- to seven-year maturities in defensive sectors. Financial subordinated debt, though more volatile, remains appealing due to its higher yields. Within the high-yield universe, the focus is on BB-rated issuers and rigorous selection based on sector resilience.
The firm emphasizes vigilance and agility as the cornerstones of portfolio management. Preserving carry and credit quality is the top priority, complemented by tactical hedges to cushion volatility.
In summary, as central banks move out of sync and warning signs multiply across credit markets, bonds remain a demanding yet promising field—one where disciplined, selective investors can still find opportunity amid uncertainty.
