IDEIAS

Markets continue to quake at the prospect of geopolitical tensions and tariffs stoking inflation and hobbling growth, while government bond yields remain in flux.

The sharp swings in rates, driven by uncertainty over the Federal Reserve’s (Fed) monetary policy response, are frustrating fixed income investors searching for stable returns.

While we do not at present foresee a big credit event, there is some slow and steady pain on the horizon for investors unwilling to put in the work to assess company fundamentals.

Shorter-duration asset classes, such as high yield (HY) bonds, offer a potential escape from the turbulence of rate volatility. However, investors will really need to know what they are doing, as, while spreads have widened, top-level valuations still look pricey – it is definitely time for active alpha, not passive beta.

Volatility spills into credit markets

Figure 1. Government bond yields continue to whipsaw

Source: Bloomberg, as at 6 March 2025.

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As Figure 1 highlights, geopolitical challenges and shifting policy regimes have caused significant spikes in 10-year government bond yields, with no sign of stabilisation. This volatility has spilled over into investment grade (IG) bonds, where rolling 12-month rate volatility (proxied by the synthetic swap return) has reached levels only seen during the COVID crisis, the Global Financial Crisis (GFC), and the Iraq war.

Figure 2: Rates volatility remains elevated compared to much of the last 20 years

Source: ICE BofA, as at 28 February 2025.

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Underpricing risk 

Corporate credit spreads, the other main component of total credit volatility, have been slower to react to market turmoil, although we have seen particular weakness in US spreads as tariff concerns continue to mount. It thus appears that credit risk is being underpriced in some parts of the market.

Investors should prepare for a more substantial shift. With ongoing uncertainties around trade policy, an increase in credit volatility seems likely in the coming months, especially as sharp shifts in political rhetoric continue to keep rates fluctuations at elevated levels.

Is there alpha?

With that said, it is important to remember that volatility is not inherently bad. Volatility breeds opportunity, and discerning the opportunity generates alpha.

There are dislocations emerging under the surface. For instance, credit spreads in the US and Europe have diverged year-to-date, with European IG credit spreads tightening by -11 basis points (bps) whilst US IG has widened by +12bps. High yield has seen a modest repricing, with European spreads widening 6bps compared to 33 bps for US HY.

It is hard to quantify the impact of tariffs ex ante, but they will inevitably create winners and losers in each region. Combining this with the likely increase in total credit volatility and you have the favourite mix for stock-pickers – dispersion.

Credit investors now feel the squeeze alongside the rest of the market. For those prepared to embrace volatility and put in the work there are opportunities — but the risks should not be ignored.

The Bears Are Back in Town

Apologies to Thin Lizzy. Our Man Group markets poll for March bore few surprises and reflected the financial markets whiplash of recent weeks, with a bearish outlook across key asset classes, and the US, in particular.

Sentiment on the outlook for US stocks and the US dollar plunged, as US President Donald Trump’s escalating trade war dials up concerns about a slowdown in economic growth (even the word recession is being rather freely muttered) and sticky inflation.

Survey participants are also holding on to their bearish view on US treasuries (expecting yields to rise, prices to fall), somewhat counter to recent market moves. The US 10-year Treasury yield has slid from January’s highs, with many investors betting that a slowdown in growth will force the Federal Reserve (Fed) to ramp up rate cuts after all.

Erosion of Fed’s 2% target?

There is a risk that bond markets are underestimating the threat of ongoing inflation by assuming the Fed will remain committed to its 2% inflation target despite persistently stronger price pressures. US inflation hit a 9% peak in June 2022, slowed to 3% in June 2023, stayed at 3% by June 2024 and has hovered around that mark since. Yes, there was a dip in the autumn, but it’s back up. 3% is not 2%.

February’s CPI print came in at 2.8% but markets largely ignored the drop from January as the data had not yet captured the impact of tariffs on prices. If inflation stays elevated and the Fed signals greater tolerance for overshooting these targets, bond yields could rise further as markets adjust to this shift in expectations.

We launched our monthly internal markets poll in June 2024, collecting insights from our investment professionals across systematic, discretionary, public and private markets. The survey does not represent a Man Group house view but instead consolidates a range of perspectives into a straightforward scoring system. With 10 months of data, it has begun to highlight shifts in sentiment and emerging trends amid ongoing market turbulence.

Our latest poll¹ ran from 6-10 March, with responses from over 80 investment professionals.

1. S&P 500: Confidence crash

Sentiment on the outlook for equities tanked over the last month. The S&P 500 reached an all-time high on 19 February but has slid to a six-month low since then on concern that the US may even enter a recession. The percentage of respondents expecting a “big up” is at its lowest since polling began in mid-2024.

Figure 3. US stocks: Aggregate sentiment

Source: Man Group as at 11 March 2025. The chart aggregates sentiment on the S&P 500, with bars showing the percentage of respondents expecting outcomes ranging from ‘Big up’ (more than +15%) to ‘Big down’ (more than -15%) over the next 12 months. The black line (right-hand axis) reflects the overall sentiment score, calculated by assigning weighted points to each response to gauge the net bullish or bearish outlook on equities. Views are provided for illustrative purposes and should not be relied upon as a recommendation.

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2. Bonds: Still bearish on duration

The consensus has remained negative on longer-term bonds (duration), with most expecting that yields will move higher. This most likely reflects concerns that inflationary pressures will persist in the US.

Figure 4. US 10-year Treasury yield: Aggregate sentiment

Source: Man Group as at 11 March 2025. This chart reflects sentiment on US 10-year Treasury yields, with bars showing the percentage of respondents forecasting outcomes from ‘Big up’ (yields rising by more than +90 basis points (bps)) to ‘Big down’ (yields falling by more than -90bps) over the next 12 months. The black line aggregates these responses into an overall sentiment score, highlighting whether participants are net bullish (expecting yields to fall) or bearish (expecting yields to rise). Views are provided for illustrative purposes and should not be relied upon as a recommendation.

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3. Oil: Relatively bearish

The poll has maintained its relatively bearish stance on oil since US election in November. Crude oil has slumped from its mid-January highs as the Trump administration’s trade policies threaten a wider economic slowdown which may weigh on global demand.

Figure 5. Oil price: Aggregate sentiment

Source: Man Group as at 11 March 2025. The chart summarises sentiment on oil prices, with bars showing the percentage of respondents predicting outcomes ranging from ‘Big up’ (more than +30%, or above US$100 per barrel) to ‘Big down’ (more than -30%, or below US$50 per barrel). The black line provides the aggregated sentiment score, calculated by assigning weights to each response to indicate whether participants are leaning bullish or bearish on oil prices. Views are provided for illustrative purposes and should not be relied upon as a recommendation.

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4. US dollar: Down, down, down

Sentiment on the US dollar has plunged from broadly neutral last month to uber-bearish. A Bloomberg measure of the dollar’s health has dropped more than 3% so far this year, its worst year-to-date performance since 2008.

Figure 6. US dollar: Aggregate sentiment

Source: Man Group as at 11 March 2025. The chart illustrates sentiment on the US dollar (proxied by the US dollar index), with bars representing the percentage of respondents expecting outcomes from ‘Big up’ (more than +8%) to ‘Big down’ (more than -8%) over the next 12 months. The black line reflects the net sentiment score, calculated by assigning weighted points to each response, providing a measure of overall bullishness or bearishness on the dollar. Views are provided for illustrative purposes and should not be relied upon as a recommendation.

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Regional views – A whole lotta love for Europe and China

Sentiment has turned sharply negative on US equities, reaching its most bearish level since the start of the survey. In contrast, there is a lot of love for Europe ex-UK, with sentiment hitting its most bullish level ever. Meanwhile, sentiment toward China has rebounded to its most optimistic level since October 2024. However, India has seen a notable decline in favour, with sentiment turning the most bearish on record.

Factor and sector sentiment – Definitely defensive 

Positioning has also shifted markedly toward defensiveness, showing significant bearishness on growth stocks, momentum, and cyclical sectors relative to defensives. Consistent with this, sentiment toward consumer discretionary stocks has fallen to new lows, while defensive sectors like healthcare and utilities have demonstrated resilience. These shifts align with a broader retreat from higher-risk assets and a preference for stability amid ongoing macroeconomic uncertainty.

All data Bloomberg unless otherwise stated.

With contributions from Jon Lahraoui, Director, Discretionary Credit, Jordan Oyemade, Investment Services Associate, Man Group and Henry Neville, a portfolio manager, Solutions at Man Group.

1. The poll focuses on quantitative responses, asking participants to indicate their directional views without providing qualitative explanations or reasoning behind their choices.

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