As trade tensions and rising inflation bring bonds back to the spotlight, wealth managers are turning to high-quality debt for income and protection, supporting a more aggressive approach.
Announced on the so-called “liberation day,” President Donald Trump’s drastic trade tariffs have immediately hit the global economy, fostering inflation, weakening growth forecasts, and causing sudden market losses. In this unstable environment, bonds have reappeared as the focus of wealthy investors.
Despite twin sales in stocks and bonds in 2022, bonds are regaining their role as an effective diversification factor. Due to the zero-profit policy era behind us, high-quality debt now offers both income and negative side protection for our high-equity portfolio.
Yet, in today’s environment of increasing uncertainty and geopolitical tension, increasing selectivity and agility is essential.
“The rise in trade tariffs and escalating trade tensions have weakened global growth and promoted inflation risk,” says Nicholas Laroche, global head of advice and asset allocation at UBP.
A long-term trade war can mark the end of globalization, increase the risk of a recession and signal the arrival of male dogs.
He expects US GDP growth to slow to just 0.5-1% in 2025, with inflation likely to reach 3-4%. Laroche advises a short period of stance as the risk of inflation increases and the Fed’s policy outlook is uncertain. “Even if the Fed lowers its fees to support growth, inflation from tariffs will cloud our long-term fee outlook,” he says.
UBP spins from “tough spreads” segments such as investment grades and high yields, and from areas with better relative value, including agency mortgage-backed securities, advanced loans and additional tier 1 (AT1) bank obligations.
“In this environment, selectivity is essential to managing risk and finding opportunities amidst macro rise and market volatility,” says Laroche.
Both 2.7% 10-year births and 4% of the US Treasury Department provide scope to respond to changes in growth and inflation, while acting as safe havens during risk-off periods. But even if a 5% investment grade yield attracts income-focused investors, tough spreads, rate volatility and political uncertainty hamper the long-term appeal of US bonds.
In contrast, the financial expansion in Europe has made longer-dated euro bonds relatively attractive. However, structurally high inflation driven by tariffs and gentle fiscal policies would challenge even these yields.
Dynamic Period
Tariffs and inflation shocks have made aggressive bond management cases accrued their status. “Risk-off sentiment and low growth outlook could temporarily lower yields,” said Christian Norting, global CIO at Deutsche Bank Private Bank. However, once the economy is adjusted, trade negotiations and financial responses could recover in play recovery, highlighting the need for “dynamic periods and credit management.”
This more aggressive stance reflects a new appreciation for the core strength of bonds. They provide predictable income and help meet future cash flow needs. “Bonuses have become much more attractive due to the real increase,” Norting said.
Although the inflation-driven sale in 2022 hit both stocks and bonds, today the balanced portfolio case remains strong, especially for cautious investors.
Deutsche Bank supports investment grade corporate bonds in the eurozone, where term premiums are re-emerging, with credit spreads offering a buffer against rising sovereign yields. “We like head office bonds due to the increasing number of attractive carry and sovereign issuance,” Norting said.
Developed market investment grade corporate bonds rank the highest among PWM’s latest global asset tracker survey bond segments (see chart 1). The survey, conducted earlier this year, has captured CIO views at 50 major private banks and managed $2.5 million in client assets. Three-quarters view bonds as effective diversifiers.
However, there is a low chance that you will be a driver when viewing the price. “We believe yields will be longer, so the price rise of the underlying instruments will not be much higher, but the current increase in yields is an attractive source of income,” explains Norting.
Tarist tariffs are focused, but are expected to be short-lived compared to recent global shocks such as the pandemic and Russia’s invasion of Ukraine. “Investors are most concerned about uncertainty and risk of escalation.”
D’Onofrio has been hedged into the US dollar in favor of a “quality carry” strategy centered on euro-religious government bonds, investment-grade companies and selected emerging market debt.
She supports the mid-3-7 years, part of the 3-7 year harvest curve, which is considered to benefit from the ECB’s expected interest rate cuts, while avoiding long-term vulnerability to Europe’s financial expansion. In contrast, high yields are underweight. “As the risk of a global recession increases, spreads may continue to spread,” she warns, warning that lower credits are likely to increase pressure.
Attractive coupons
D’Onofrio expects 10-year bond yields to remain stable in both the US and the eurozone, with interest rate cuts being priced primarily and issuances staying high. In the eurozone, she sees value in government bonds, supported by “attractive coupon levels and clear ECB rate reduction passes.”
Italian BTPS stands out and offers higher yields than its French peers, who are not sensitive to political risk. She says that stable eurozone yields and “a favorable carry makes BTPS attractive to income-centric investors.” “They provide an attractive blend of stability and performance.”
Corporate debt in the banking sector, especially, looks attractive. A strong balance sheet and disciplined cash management continue to support the quality of credit, even amidst uncertainty.
“European financial bonds are well positioned,” she says.
US government bond profits still offer solid gross revenue potential and portfolio diversification, according to Solita Marcelli, CIO Americas at UBS Global Wealth Management. “In a downside scenario, yields could fall to 2.5%, presenting a prominent capital gain opportunity,” she says.
She also sees opportunities for luxury credit and diverse strategies, including advanced loans and private credit.
Crossover Credits
The bonds have returned to their advantage, but wealth managers will come to argue that it is no longer sufficient for effective diversification. UBP is reassigned to hedge funds with reduced bond exposure in their multi-asset portfolio and with low equity correlation.
At Edmund de Rothschild, Nicholas Bickel, chief investment officer of the Geneva-based private banking division, considers core bond allocations, particularly high quality credits, to be valuable. He also selectively uses alternatives such as private equity and gold. Investment-grade bonds offer attractive risk-adjusted returns despite their tough spreads, but private assets help attenuate volatility due to their low pricing, he says (see chart 2).
Bickel warns against double the macro risk. “If you’re an overweight stock, you don’t want advanced bonds that are at the same risk,” he says. He also sees value in subordinated bank debt and hybrid companies. These provide a higher yield on the well-valued issuer’s creditworthiness if the investor is satisfied with the subordinate risk.
Former bond trader Bickel sees the bond market as a better recession indicator than stocks. “The stock market predicts nine of the last five recessions, meaning four were wrong. Bonds have historically been a more reliable predictor of economic recession,” he points out.
“Lately, widening bonds refers to an increased risk of a recession, but current levels are below the levels seen in past recessions,” he says.
Although recent volatility has not caused a surge in combined allocations, he explains that overshooting high yield spreads during stress periods, such as those seen during Covid-19, could present an attractive entry point.
Standard Chartered’s CIO for Africa, Manpreet Gill from the Middle East and Europe, is structural and divides its portfolio into basic and opportunistic allocations.
“It’s about fixing it on long-term exposure, leaving room for tactical dislocations to exploitation,” he says. Due to the tight credit spreads, banks aim to target high-yield bonds in developed and Asian markets and “get yields and treat them upside down as bonuses.”
Inflation above 3% “flips” the historical correlation between stocks and bonds, Gill said, underscoring the need for exposure to alternatives such as gold and the private market.
He views developed market government bonds as unattractive given their sensitivity to interest rates and supports corporate bonds. Germany’s vast financial stance weakens short-term lawsuits on government bonds in the eurozone, he added. Europe’s finances remain a bright spot.
He also warns against the recognized safety of cash. “This is a comfort zone for many investors, but once the Fed begins to cut, cash returns begin to erode rapidly.” So, standard chartered is urging conservative investors to begin “locking yields and building up exposures to growth,” even at a modest rate. “This isn’t a straightforward market anymore. You need to be agile and trained.”
Active monitoring
Changes in bond strategies reveal persistent client misconceptions. Focusing is a common investor pitfall, Gill says.
D’Onofrio of UnicRedit warns that bonds are not always a safer choice. “Clients may associate stock exposures with risk, but in the long run, excessive bond allocations may also not meet their actual return targets.”
Laroche of UBP is urging investors to adhere to discipline. “The biggest major failure we see is to undermine the struggle, hoping to be driven by a disgust to realize our losses,” he warns. “Actively replacing a weakened position can avoid catastrophic consequences, especially if your assets are not yet at a state of distress.”
Going forward, Deutsche Bank’s Norting looks at the dynamic role of bonds determined by real interest rates and political developments. He urges private investors to include alternative assets, if they understand liquidity trade-offs beyond traditional bonds and equities.
Bonds continue to be a central pillar of wealth management, he says, but now they demand more “active surveillance,” more keen judgment and greater flexibility.
