Monthly Bond Commentary - March 2025

Tariffs are the talk of the street. For several weeks markets have been fretting over the extent of Trump's 'Liberation Day' and initial readings are much worse than almost anyone feared. Predictably, equity indices around the world have reacted negatively and are approaching bear market territory with American markets suffering the most. Concern that the steepest increase in American tariffs in a century will hamper economic growth is driving a strong rally in global bonds, sending the yield on benchmark 10-year Treasury below the closely-watched 4% level from 4.35% just a week ago. The US dollar also reacted negatively given higher inflation expectations and the Euro had its best day versus the greenback since 2015. The talked about recession in America could of course be a problem in coming months.

The exact impact and countermeasures will not become clear for many weeks and we could still see a reduction in some of the announced rates if countries acquiesce and reduce barriers on US goods. However, in the meantime government bond markets are set to outperform with uncertainty and equity volatility rising. Though corporate spreads have risen over recent days demonstrating the uncertainty in the system, as typically corporate bond and equity markets are inversely correlated. As mentioned last month, inflation is a risk to our outlook and is likely exacerbated by tariffs. However, with a wide geographical allocation we anticipate reducing this risk.

Our fixed income focused portfolio management strategies will help maintain their benchmark beating performance. It is of course very difficult to predict how the next few weeks, let alone further out, will turn out but our close monitoring and intelligent investment decisions will help safeguard client capital and income. 

Looking to the AT1 market, a large part of all of our client portfolios, a noteworthy story came from Deutsche Bank (DB) who skipped the call option on a dollar AT1 in March. Ordinarily this would be taken negatively given investors expect all AT1 bonds to be called at their first opportunity. However, in this instance, DB would record a €240mn loss on the redemption due to currency movements since the bond was issued in 2014 and coupon will rise to c.8.25% giving every reason for investors to be happy. Because of this, the market has been more accepting given the economic factors and in fact the price of the bond rose following the announcement. Interestingly, DB came to the market for a new euro AT1 the following day and received €10bn of orders; the largest order book for euro AT1 so far this year.