As rising trade tensions and inflation push bonds back into the spotlight, wealth managers are turning to high-quality debt for income and protection, favouring a more active approach.

President Donald Trump’s sweeping trade tariffs, unveiled on so-called ‘liberation day’, have dealt an immediate blow to the global economy, fuelling inflation, weakening growth forecasts, and triggering sharp market losses. In this volatile environment, fixed income has re-emerged as a focal point for wealthy investors.

Despite the bruising twin sell-off in equities and bonds in 2022, bonds are reclaiming their role as effective diversifiers. With the era of zero-interest rate policy era behind us, high quality debt now offers both income and downside protection for equity-heavy portfolios.

Still, in today’s climate of heightened uncertainty and geopolitical strain, greater selectivity and agility is essential.

“Rising trade tariffs and escalating trade tensions are dampening global growth and fuelling inflation risks,” says Nicholas Laroche, global head of advisory and asset allocation at UBP.

A protracted trade war could mark the end of globalisation, raising the risk of recession and ushering in a period of stagflation — slowing growth coupled with rising prices.

He expects US GDP growth to slow to just 0.5 to 1 per cent in 2025, with inflation likely to reach 3 to 4 per cent. With inflation risks elevated and the Fed’s policy outlook uncertain, Mr Laroche advises a shorter duration stance. “Even if the Fed cuts rates to support growth, inflation from tariffs clouds the outlook for longer-term rates,” he says.

UBP is rotating out of ‘tight-spread’ segments like investment grade and high yield, and into areas with better relative value, such as agency mortgage-backed securities, senior loans and additional Tier 1 (AT1) bank debt

“Selectivity is essential in this environment, both to manage risk and to find opportunities amid rising macro and market volatility,” says Mr Laroche.

Both 10-year Bunds at 2.7 per cent and US Treasuries at 4 per cent offer scope to react to shifts in growth and inflation, while acting as safe-havens in risk-off periods, he adds. But tight spreads, rate volatility and political uncertainty weigh on the appeal of long-dated US bonds, even as 5 per cent investment-grade yields draw income-focused investors.

In contrast, Europe’s fiscal expansion has made longer-dated euro bonds comparatively more attractive. But structurally higher inflation, driven by tariffs and looser fiscal policy, would challenge even these yields.

Dynamic durations

With tariffs and inflation shocks, the case for active bond management is gaining ground. “Risk-off sentiment and lower growth prospects can drag yields down temporarily,” says Christian Nolting, global CIO at Deutsche Bank Private Bank. But as economies adjust, with trade negotiations and fiscal responses in play, yields may rebound, underscoring the need for “dynamic duration and credit management”.

This more active stance reflects a renewed appreciation for bonds’ core strength. They provide predictable income and help meet future cash flow needs, an increasingly valuable trait after years of low real yields. “Bonds became much more attractive due to the rise in real rates,” says Mr Nolting, pointing to the end of financial repression.

While an inflation-driven sell-off in 2022 hit both equities and fixed income, today the case for a balanced portfolio remains strong, he says, particularly for cautious investors.

Deutsche Bank favours eurozone investment-grade corporate bonds, where term premiums are re-emerging, and credit spreads provide a buffer against rising sovereign yields. “We like corporate bonds due to attractive carry and increased sovereign issuance,” says Mr Nolting.

Developed market investment-grade corporate bonds ranked top among fixed income segments in PWM’s latest Global Asset Tracker Survey ( see chart 1). The survey, conducted earlier this year, captured the views of CIOs at 50 leading private banks, managing $25tn in client assets. Three-quarters view bonds as effective diversifiers.

However, price appreciation is unlikely to be the driver. “We believe yields will be higher for longer, so significant price appreciation of the underlying instrument is unlikely, but current elevated yields are an attractive source of income,” explains Mr Nolting.

While tariffs remain in focus, their inflationary impact is expected to be short-lived compared with recent global shocks, such as the pandemic and the Russian invasion of Ukraine, says Manuela D’Onofrio, head of global investment strategy at UniCredit Group. “Investors are most concerned about uncertainty and escalation risks.”

Ms D’Onofrio also favours a “quality carry” strategy, centred on euro-denominated government bonds, investment-grade corporates and selected emerging market debt, hedged into US dollars.

She favours the intermediate, 3-7 year, part of the yield curve, seen as benefiting from the ECB’s anticipated rate cuts while avoiding long-end vulnerability to Europe’s fiscal expansion. High yield, by contrast, is underweighted. “Spreads could continue to widen as global recession risks grow,” she warns, with lower-quality credit likely to come under increasing pressure.

Attractive coupons

Ms D’Onofrio expects 10-year bond yields in both the US and eurozone to hold steady, with rate cuts largely priced in and issuance staying high. Within the eurozone, she sees value in government bonds, supported by “attractive coupon levels and a clear ECB rate cut path”.

Italian BTPs stand out, offering higher yields than French peers less sensitive to political risk. Stable eurozone yields and “favourable carry make BTPs appealing for income-focused investors”, she says. “They offer a compelling blend of stability and performance.”

Corporate bonds, especially in the banking sector, also look attractive. Strong balance sheets and disciplined cash management continue to support credit quality, even amid uncertainty.

“European financial bonds are well positioned,” she says, “underpinned by solid capital buffers and business models that depend less on net interest margins and more on asset management services.”

US 10-year government bond yields still offer solid total return potential and portfolio diversification, says Solita Marcelli, CIO Americas at UBS Global Wealth Management. “In a downside scenario, yields could fall to 2.5 per cent, presenting notable capital gain opportunities,” she says.

She also sees opportunities in high-grade credit and diversified strategies such as senior loans and private credit.

Crossover credit

While bonds have bounced back into favour, wealth managers increasingly argue they are no longer sufficient alone for effective diversification. UBP has reduced fixed income exposure in multi-asset portfolios, reallocating to hedge funds with low equity correlation.

At Edmond de Rothschild, Nicolas Bickel, chief investment officer of the Geneva-based private banking department, sees value in core bond allocations, especially high-quality credit, as a buffer against equity volatility. He also winds in selective use of alternatives such as private equity and gold. Investment-grade bonds offer compelling risk-adjusted returns despite tight spreads, while private assets help dampen volatility thanks to less frequent pricing, he says (see chart 2).

Mr Bickel warns against doubling up on macro risk. “If you’re overweight equities, you don’t want high-yield bonds with the same risk exposure,” he says, favouring BBB or crossover credit to stay defensive. He also sees value in subordinated bank debt and hybrid corporates. These offer higher yields with the credit strength of well-rated issuers, provided investors are comfortable with subordination risk.

Mr Bickel, a former fixed income trader, sees the bond market as a better recession indicator than equities. “Equity markets have predicted nine of the last five recessions, meaning they were wrong four times. Fixed income has historically been a more reliable predictor of economic downturns,” he notes.

“In recent days, widening bond spreads point to rising recession risks, though current levels remain below those seen in past recessions,” he says.

While recent volatility has not sparked a surge in bond allocations, overshoots in high-yield spreads during periods of stress, such as those seen during the Covid-19 period, can present attractive entry points, he explains.

Manpreet Gill, Standard Chartered’s CIO for Africa, the Middle East and Europe, sees volatility as structural and divides portfolios into foundational and opportunistic allocations.

“It’s about anchoring in long-term exposures while leaving room to tactically exploit dislocations,” he says. With credit spreads tight, the bank is targeting high-yield bonds in developed and Asian markets to “earn the yield and treat any upside as a bonus”.

Inflation above 3 per cent “flips” the historical correlation between stocks and bonds, says Mr Gill, highlighting the need for exposure to alternatives such as gold and private markets.

He favours corporate bonds, viewing developed market government bonds as least attractive, given their sensitivity to interest rates. Germany’s expansive fiscal stance, he adds, weakens the near-term case for eurozone government bonds. European financials remain a bright spot.

He also warns against the perceived safety of cash. “It’s a comfort zone for many investors, but when the Fed starts cutting, cash returns start eroding fast.” That is why Standard Chartered urges conservative investors to start “locking in yields and building some growth exposure”, even in modest proportions. “This is not a straight-line market anymore. You need to be agile and disciplined.”

Active oversight

The shift in fixed income strategy is also exposing persistent client misconceptions. Concentration is a common investor pitfall, says Mr Gill, urging investors to diversify credit exposure across geographies and issuers.

UniCredit’s Ms D’Onofrio cautions how fixed income is not always the safer choice. “Sometimes clients associate equity exposure with risk, but in the long term, excessive bond allocations can also fall short of real return targets.”

UBP’s Mr Laroche urges investors to stay disciplined. “The biggest significant misstep we see is holding onto weakening positions in hope of a return to par, driven by an aversion to realising a loss” he warns. “Proactively replacing deteriorating positions, even at a loss, can avert catastrophic outcomes, particularly when the asset has not yet reached a distressed state.”

Looking ahead, Deutsche Bank’s Mr Nolting sees a dynamic role for fixed income, determined by real rates and political developments. He urges private investors to look beyond traditional bonds and equities, and to include alternative assets, provided they understand the liquidity trade-offs.

Bonds remain a central pillar of wealth management, he says, but one that now demands more “active oversight”, sharper judgement, and greater flexibility.