4Q 2025

Global Fixed Income Views

Themes and implications from the Global Fixed Income,
Currency & Commodities Investment Quarterly

Author
In brief
• Market calm has been restored as economies have adapted to U.S. tariffs and
the Federal Reserve (Fed) has restarted its rate cutting cycle. We believe that
the support for global bond markets can continue into 2026. With considerable
cash on the sidelines, we consider any sell-off a buying opportunity.
• Risks include inflation settling at a structurally higher rate. It is not entirely
improbable that looser monetary policy, combined with global fiscal stimulus,
Bob Michele could reinvigorate capex and hiring next year, potentially leading to a future
Global Head of Fixed wage-price spiral under a new Fed Chair.
Income, Currency &
Commodities and • We think the fed funds rate will settle at 3.375% by Q1 2026, with the 10-year
Co-Head of the Asset Treasury yield between 3.75% and 4.25%.
Management Investment
Committee
• We reduce the likelihood of Crisis to 5%, and of Recession to 10%. We raise by
10 percentage points the probability of Above Trend Growth (now 20%) and
leave Sub-Trend Growth unchanged, at 65%.
• Opportunities include assets likely to outperform in a continued expansion: global
hybrid capital notes, emerging market debt (local sovereigns and corporates) and
leveraged credit (high yield, broadly syndicated loans and direct lending).

Our September Investment Quarterly (IQ) was held in London, coincidentally

during President Trump’s state visit. While the official trip was accompanied
by considerable pomp and pageantry, our meeting had much less grandeur,
with the focus on the impact of the administration’s policies across
economies and markets. Monetary policy was also in the spotlight, as the
Federal Reserve (Fed) cut rates for the first time since December 2024.
Scenario probabilities (%) Despite the recent swirl of global fiscal and monetary policies, financial markets
have enjoyed considerable returns with surprisingly little volatility. Against this
65 65 backdrop, IQ members debated whether these favorable market conditions
would continue or if something out there could potentially derail them.

Macro backdrop
The group acknowledged that markets had calmed down since Liberation
20
15 Day in April. U.S. tariffs have been deployed and governments, businesses
10 10 10 and households spent the last quarter adjusting to them. We estimate that
5
the average U.S. tariff rate is close to 16%. So far, businesses have absorbed
3Q25 4Q25 3Q25 4Q25 3Q25 4Q25 3Q25 4Q25 a fair share of the tariff costs while maintaining their operating margins;
Above Sub- Recession Crisis consumers have paid the remainder.
Trend Trend
Growth Growth The U.S. fiscal balance is benefiting from greater revenue. Meanwhile,
Source: J.P. Morgan Asset Management. governments around the world are deploying policies to offset the impact.
Views are as of September 18, 2025. We recognize that global trade involves many moving parts, and there may
come a point when businesses feel compelled to pass a Scenario expectations
greater share of the tariffs on to the consumer, causing
We reduced by 5% each the likelihood of Crisis (now
demand destruction. Already, we are seeing corporate
5%) and Recession (now 10%). With policymakers
America in a hiring pause that has led to a slowdown in
globally focused on providing monetary and fiscal
the labor markets.
accommodation to cushion the impact of trade policies,
The Fed is responding to this with rate cuts, but fiscal an orderly or disorderly contraction is far less likely
stimulus is also on the way globally. In the U.S., the to occur. We shifted that cumulative 10% into Above
impacts of the One Big Beautiful Bill Act (OBBBA) will Trend Growth (20%). We can envision, as global fiscal
hit at the start of 2026; in Germany there are plans for stimulus hits next year, business profitability triggering
a sizable spend on defense and infrastructure and a meaningful resumption of hiring and capex. We left
in China, policymakers are focused on fixed asset Sub-Trend Growth (65%) unchanged. Businesses and
investment. We expect the European Central Bank to households seem to be gliding into year-end despite
pause at 2%, having already cut rates substantially. The slower hiring and spending.
Bank of England will resume rate cuts in the spring.
It will likely take some time for the global economy to
Despite tariffs, the group was impressed that inflation adjust to the new paradigm of trade negotiation and
expectations have remained contained. Market reshoring, but we have confidence that policymakers will
participants remain comfortable that the impact will be stand by ready to assist.
temporary. While inflation is likely to stay above developed
economy central banks’ 2% targets through the middle Risks
of next year (running now around 3%), the overshoot is
The greatest risk is that inflation settles in at a structurally
concentrated in goods prices and not services. In China,
high rate, given that inflation has persistently run well
there is deflation in intermediate and finished goods.
above the central bank’s 2% target. Despite this, the Fed
The metric the group is most focused on is wage growth. is focused on ensuring the labor market remains firm,
For now, it is stable, but if wage growth were to weaken and is willing to ease policy to guarantee that. Further,
further, it would imply less labor demand and a greater the next Fed chair and Federal Open Market Committee
probability of economic contraction. Firmer wage growth (FOMC) appointees are likely to be supporters of the
would tell us that businesses have been able to navigate administration’s view that lower policy rates will lead to
tariff policy and are hiring again and investing in capex stronger growth. The “next Paul Volcker,” an inflation
on the expectation of higher revenue growth. Firmer vanquisher using dramatic interest rate hikes, is not on
growth would be a validation that the fiscal and monetary any administration’s short list of candidates.
responses have worked to offset the tax of tariffs.
It does not seem entirely improbable that looser
We appreciate that markets may see further fiscal and monetary policy, combined with an influx of global fiscal
monetary developments. Lack of a trade agreement stimulus, could lead to a wage-price spiral. Sovereign
between the U.S. and China could be destabilizing. borrowing and spending seem to have become
Midterm elections in the U.S. are only a year away, business as usual, while debt brakes and austerity have
and we could see more policy change from the U.S. become outdated concepts. We should also be mindful
administration in the form of deregulation or additional that an awful lot of money is still sloshing around the
fiscal stimulus. But for now, the surprising calm should system from the pandemic-era policies.
continue through year-end and as we roll into 2026, the
A lesser risk is that the highest rate of tariffs in a century
stimulative impact of the OBBBA should more than offset
proves to be a bigger tax on the global economy, and a
the drag of tariffs.
contraction ensues. Businesses pulling back on their
tech capex could also contribute to a slowdown in growth.
Separately, if central banks renew their fight against
inflation, a key support for markets will evaporate.

2 Global Fixed Income Views

Strategy implications Closing thoughts
The group was focused on opportunities that would While policymakers and the markets are enjoying an
outperform in a moderate expansion. The risk-on bias extended soft landing, the question is what comes
led us to global hybrid capital notes, emerging market next. In the U.S., tariff policy has yet to be fully shaped
debt (local sovereigns and corporate debt) and leveraged and implemented, the OBBBA has yet to take full effect,
credit (high yield, broadly syndicated loans and direct and the future leadership of the Fed and its longer-
lending). There was some preference to maintain a term rate path are unknown. Outside of the U.S., the
modest long duration bias expressed through U.S. impact of fiscal spend across Europe has yet to be
Treasuries and an ongoing view that the U.S. dollar would realized. China has to execute on a bold plan to bolster
continue to weaken, perhaps another 5%. We think the fixed asset investment and consumption. And lastly,
fed funds rate will settle at 3.375% by Q1 2026, with the conflicts are still ongoing in Ukraine and the Middle
10-year Treasury in a range of 3.75%-4.25%. East. Nonetheless, the resilience of businesses and
While the low volatility, high return environment should households has been impressive, and policymakers are
continue over the next couple of quarters, the group had in an accommodating mood. Despite some skepticism
hoped we would see a “Buy the rumor, sell the news” that the good times in markets can roll on, we remain
market consolidation following the FOMC meeting. We focused on harvesting yield and return from an array of
acknowledge there is still a considerable amount of global bond markets.
cash on the sidelines looking to get into these markets
and any sell-off should be a buying opportunity.

Expansion Contraction
Above Trend Sub Trend Recession Crisis
Global GDP growth >3.5% Global GDP growth Global GDP growth A disorderly movement in
Inflation >2% 2%–3.5% <2% markets causes systemic
Inflation ~2% impact and tail risk
Probability 20% 65% 10% 5%
Change from
+10% Unchanged -5% -5%
last quarter
Drivers Hiring reaccelerates after a A “low-hire, low-fire” labor market Payrolls turn negative and the Dysfunction in U.S. policy
period of tariff- and policy-driven keeps unemployment rate low and unemployment rate moves and institutional stability
uncertainty wage growth moderate meaningfully higher. Layoffs lead causes market participants
to weak income growth and a to reevaluate the safe-haven
Capital investments, led by AI and Weak cyclical hiring is offset by
decline in consumption properties of Treasury
other technologies, combine with strong capex demand, resulting
securities and the USD
expansionary fiscal policy to spur in modest activity and non- After an extended period of
reacceleration in growth threatening inflation high tariffs and low pricing
power, corporate margins and
Economic resilience is supported Strong private sector balance
profitability come under pressure
by strong corporate and sheets buffer against further
consumer balance sheets tariff headwinds

Monetary A reemergence of inflationary Central banks use a risk Central banks accelerate the Neither central bank easing
and fiscal pressures causes central banks management approach and pace of rate cuts and markets nor fiscal policy is sufficient
environment to shift away from easing biases gradually ease toward neutral price terminal rates below neutral to forestall systemic impact
Fiscal policy across the globe Modest fiscal impulse offsets the Automatic stabilizers from
promotes growth impact of tariffs countercyclical programs help
manage growth

Market and Risk assets, especially public and Corporates, agency mortgages, Core government bonds and Cash and alternative reserve
positioning private high yield, lower-rated securitized and local EM rates high quality securitized credit currencies outperform
investment grade credit and outperform outperform as right-way correlations
lower-quality emerging market break down
Intermediate duration serves as an Government curves bull steepen
(EM) debt outperform
effective positive carry hedge aggressively

Source: GFICC Investment Quarterly; as of September 18, 2025. Forecasts, projections and other forward-looking statements are based upon current beliefs
and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated
with forecasts, projections and other forward statements, actual events, results or performance may differ materially from those reflected or contemplated.
MBS: mortgage-backed securities.

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