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Donald Trump is not only shaking up politics and equity markets, but also impacting the fixed-income segment: his unpredictable trade policy poses risks to economic growth in many countries and is likely to fuel inflation in the US. Nonetheless, there are opportunities for investors: “High-yield bonds are offering attractive returns in some cases,” explains Carsten Gerlinger, Managing Director and Head of Asset Management at Moventum AM.

The US economy has recently shown early signs of weakness. The inflation rate stood at 3.0 per cent in January, falling to 2.8 per cent in February. Core inflation dropped from 3.3 to 3.1 per cent. What happens next remains uncertain. “Trump’s policies are likely to have an inflationary effect,” says Gerlinger. On the one hand, additional import tariffs raise the cost of goods; on the other, the deportation of illegal immigrants is likely to exacerbate tensions in the labour market and further stoke inflation.

At its latest meeting, the US Federal Reserve kept interest rates steady at 4.25 to 4.5 per cent. However, the Fed took a more pessimistic view on growth and inflation. It lowered its growth forecast from 2.1 to 1.7 per cent, while raising its projection for core inflation at the end of 2025 from 2.5 to 2.8 per cent. A narrow majority of Fed governors now expect just two interest rate cuts this year, citing increased uncertainty in the global outlook. “The central bankers are likely to wait and see how Trump’s policies develop,” Gerlinger adds.

Long-dated bonds therefore remain volatile. “Our focus continues to be on the short end of the curve or strategies close to the money market,” says Gerlinger. With high-yield and corporate bonds, credit spreads have narrowed significantly, reflecting the fundamentally sound position of many companies. “The absolute yield level of high-yield bonds – around seven per cent – is appealing to many investors and provides a cushion against spread widening and/or rising rates.” US corporate bonds currently yield around 5.2 per cent, slightly above money market rates (4.25 – 4.5 per cent), although they carry interest rate risk. Currency risk is expected to remain limited: in the longer term, the US dollar is likely to trade sideways or return to its previous range of 1.05 to 1.10 to the euro.

In Europe, economic recovery remains sluggish, with Trump’s trade policy hanging over the continent like the sword of Damocles. On the other hand, sentiment in the manufacturing sector has recently improved – albeit from a low base – and the easing of fiscal rules may further support confidence, though it is also pushing up interest rates. The annual inflation rate in the euro area fell to 2.3 per cent in February, down from 2.5 per cent in January. However, core inflation stood at 2.6 per cent, with services in particular seeing price increases (+3.7 per cent). Markets currently expect two further rate cuts from the European Central Bank, followed by a pause in the second half of the year. Uncertainty remains high in Europe as well.

“The risk/reward profile of German government bonds remains unattractive,” Gerlinger concludes. As in the US, spreads on European high-yield bonds have narrowed significantly – a reflection of the solid state of companies. “For many investors, the high-yield return level of 4.9 per cent is appealing,” Gerlinger says. It also offers a margin of safety should spreads widen. In contrast, the yield level of investment-grade bonds is not particularly rewarding compared to government bonds.

According to Gerlinger, there are also opportunities in emerging market bonds. Local currency bonds in countries like Brazil, for example, are offering high real yields of around seven per cent. Hard currency corporate bonds from emerging markets are also offering higher spreads than their counterparts in developed markets.