“Flexibility and adaptability” necessary to to | Australian Markets

American fixed income specialist and GSFM accomplice, Payden & Rygel, has urged portfolio managers to undertake an absolute return strategy to proceed to ship dependable income for traders within the face of “shifting economic forces” inflicting bond market volatility, notably as US President Donald Trump continues on his tariff trajectory.

Payden & Rygel Director and Portfolio Supervisor, Eric Souders, mentioned this market uncertainty continues to fuel the potential emergence of ‘Bond Wars’, which is why an absolute return strategy that leverages a “flexible and adaptable” method to investing could be vital to make sure investor returns stay unhurt.

“As we move through 2025, the interplay of economic, fiscal, and political factors has created a landscape filled with both opportunity and risk for bond investors. We are likely entering a new regime characterised by higher volatility in interest rates, inflation, and credit spreads,” he mentioned.

“The flexibility for portfolio managers to adapt, with out being constrained by a bond benchmark, will grow to be more and more important this 12 months within the face of better uncertainty. Inflation dynamics stay in flux as a new US Treasury Division strategises the steadiness between fiscal and financial situations, and Trump’s second administration introduces important dimensions to coverage and growth equivalent to tariffs and US-focused insurance policies.

“Market forces across the bond market can shift in both cyclical and structural ways. Cyclical shifts can occur rapidly, rendering forecasts outdated, increasing uncertainty, and driving price volatility across financial assets. Structural shifts typically take longer to unfold and require time to unveil unexpected plot twists. An absolute return fixed income strategy is important in the current uncertain environment, with greater volatility in bond prices.”

Souders mentioned leveraging an absolute return strategy would permit fund managers to adapt to rapidly-changing markets, as it isn’t tied down by benchmark efficiency and is taken into account relative to money.

In response to Souders, US growth has sat above 5 per cent in nominal phrases and above 2.5 per cent in actual phrases each for seven out of eight quarters; US equities and housing costs report all-time highs on the identical time as credit spreads are at 20-year lows. This mixture is set to put stress on bond costs this 12 months.

“The bond market is at an inflection point. Forces of light have been strong in the last two years, with solid growth, stable employment, and record-high asset prices. However, the dark side lingers as inflation remains elevated and bond market volatility is too high. Order must be restored as the key players in this saga aim to complete their various objectives,” Souders mentioned.

“The US economic system is doing nicely and doesn’t need more growth, with some arguing it may even benefit from much less growth. Donald Trump’s victory within the 2024 elections was largely pushed by voters prioritising the economic system, notably inflation, over asset appreciation or financial growth. Tariffs have solely added to inflationary pressures.

“The Payden Unconstrained Bond workforce envisions a potential plot twist within the Bond Wars, the place bond yields should rise earlier than they will fall. An increase in yields, notably in longer-term maturities, would tighten financial situations and mood growth expectations. As a end result, the Unconstrained Bond workforce prefers much less publicity to the long finish of the yield curve.

“Conversely, the workforce finds the entrance finish of the bond yield curve engaging, with two-year rates of interest simply above the Fed Funds Charge and aligned with the US Federal Reserve’s response perform to any deterioration within the labour market or growth.

“The question remains whether the new coalition within the red wave, helmed by US Federal Reserve Chair Jerome Powell, US Treasury Secretary Scott Bessent, and President Donald Trump, can vanquish inflation, or if the scales will tip, reigniting the eternal battle between the forces of order and chaos lurking in the bond market.”