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Q3 2025

Fixed Income Outlook

Bond markets are not immune to the effects of evolving trade policy and geopolitical events, not to mention the anticipation and actual moves in central bank policy rates. While interest rate risk appears elevated in this environment, income remains very attractive. Alpha-seeking investors from across our fixed income platform provide perspective.
Read the full Fixed Income Outlook Read the full Fixed Income Outlook

Key takeaways

1

All eyes on income

With debt markets again offering historically high yields, especially at the front end of the curve, we’re prioritizing income over duration.
2

Duration still matters

The direction of long-term rates may not follow Federal Reserve (Fed) policy as strongly as in the past, meaning where you hold duration can matter as much as how much.
3

Tax-exempt and tariff-lite

For U.S. investors, municipal bonds may provide a history of steady returns, relatively muted exposure to tariff risks and attractive after-tax yields.1

Bond market trends

Markets have cheered the softening of tariff announcements that reduced the risk for worst-case scenarios for the growth and inflation outlook. Yet, with ultimate outcomes still unknown, it's crucial to monitor ongoing disruptions and their potential impact on markets and portfolios.

 

In our first quarterly Fixed Income Outlook, our active fixed income investors offer their global views on key themes they see shaping markets: income over duration plays, the evolving utility of long-duration bonds as ballast for portfolios overall, and how a systematic fixed income lens delivers fresh insights. We dig into these topics and more as we explore the opportunities for bond portfolios today.

We believe the current fixed income landscape provides a generational opportunity for bond allocations.

Rick Rieder
Chief Investment Officer of Global Fixed Income

Income, income and income

Rick Rieder, Chief Investment Officer of Global Fixed Income favors income-generating investments in an environment of heightened uncertainty and unreliable correlations. This includes prioritizing income over duration as historically high yields, especially at the front end of the curve, offer the chance to earn attractive returns from high-quality borrowers with little duration risk.2 Rick sees after-inflation yields eclipsing run-rate inflation, something rarely seen over the prior few decades.3

Shaky markets, steady yields

Pat Haskell, Head of the Municipal Bonds Group, outlines the opportunity for tax-exempt municipal bonds, noting that their tendency to provide a stable source of return can make them valuable portfolio additions amid market volatility. Because they’re often linked to public authorities that provide fee-based essential services or secured by tax revenues, munis have been insulated from inflation shocks and global trade fallout. A history of low default rates and high credit ratings adds to the case for the asset class in today’s uncertain environment.

Reallocation and regional expertise

Tariff concerns have likely been driving performance across markets, including European fixed income. This, combined with geopolitical uncertainty, has helped intensify investor caution, underscoring the importance of maintaining well-diversified portfolios to navigate a complex environment. Simon Blundell and James Turner, Co-Heads of European Fundamental Fixed Income, discuss how European fixed income is increasingly seen as a compelling diversifier for global portfolios, offering stability, liquidity and strong risk-hedging potential amid shifting capital flows and geopolitical uncertainty.

You can run, but you can’t hedge

Long-term interest rates may no longer track Fed policy as closely as they once did. This shift means that where investors take duration exposure is likely just as important as how much they take. Tom Parker, Chief Investment Officer, and Jeff Rosenberg, Senior Portfolio Manager, from BlackRock’s Systematic Fixed Income team argue that this calls for a broader view of traditional fixed income's diversification role. Specifically, they consider looking beyond long-end U.S. duration to shorter maturities and global markets for effective portfolio hedges. A systematic investment approach, they believe, is essential for navigating this evolving landscape.

Bonds without borders

Michael Gates, Head of Model Portfolio Solutions, sees international bonds as one opportunity to enhance portfolio diversification today. The reasons: first, potential one-time inflationary shocks inside the U.S. (as the tariffing country) could mean one-time deflationary shocks for tariffed countries (i.e., the rest of the world); and second, global central banks are likely to cut interest rates more often and more aggressively than the Fed. The upshot: a near-term opportunity to benefit from non-U.S. government and investment-grade bond exposure.

Top investor questions for the Q3 Fixed Income Outlook

  • Prioritizing income over duration is important due to heightened uncertainty and unreliable market correlations. Yields are historically high, especially at the front end of the curve, allowing investors to seek attractive returns from high-quality borrowers with minimal duration risk.4 Even with higher inflation, today’s nominal yields significantly surpass run-rate inflation, making them a compelling opportunity.5

  • Tax-exempt municipal bonds have provided a stable source of return across time. Often linked to public authorities that provide essential services or secured by taxes on sales, property and income, munis can offer greater insulation from inflation shocks and global trade tensions. Additionally, municipal bonds have historically shown low default rates and high credit ratings, making them a potentially reliable asset class in today’s uncertain macro and market environment.

  • Heightened volatility from tariff concerns and geopolitical uncertainty has led to a clear divergence between U.S. and European markets, with global investors seeking greater stability and considering diversifying away from U.S. assets.6 We believe European fixed income offers stability and liquidity, making it an attractive option for investors looking to navigate an increasingly complex environment.

  • Investors could broaden their approach by looking beyond traditional long-end U.S. duration. As long-term rates decouple from Fed policy, where duration is held likely becomes as important as how much. Shorter maturities and global exposures may offer better diversification and hedging. Tools like large language models can also enhance insights—analyzing cross-country fiscal sentiment to inform positioning across economic regimes.

  • International bonds can enhance portfolio diversification by providing potential price appreciation during deflationary shocks in non-U.S. countries, while the U.S. may face inflationary shocks due to tariffs. Global central banks are also likely to cut rates more aggressively than the Fed, creating opportunities in non-U.S. government and investment-grade bonds. We believe a USD-hedged approach to investing in international bonds may provide better risk characteristics.

  • Although trading decisions should vary for each investor, it’s important to keep in mind the role fixed income plays in your portfolio, whether it’s income, diversification or total return. Experienced bond managers can uncover attractive investment opportunities amid turbulent markets.

  • Historically, recessions have been accompanied by lower target interest rates which results in higher bond prices. Longer duration bonds have higher sensitivity to interest rates and, all things equal, have experienced greater price appreciation as interest rates fall.