Tony Rodriguez, Head of Fixed Income Strategy for Nuveen, joined Keith Black, Managing Director of RIA Channel, to discuss this year’s fixed-income market. With range-bound rates, security selection will be the key driver of fixed-income returns.
Nuveen believes that 2025 will be an attractive fixed-income environment. Investors are looking to their fixed-income holdings to provide income, liquidity, and a low correlation to risk assets. While Rodriguez used to be the head of “no income strategy,” today’s fixed-income markets have some of the highest starting yields in years.
Liquidity in the fixed-income portfolio becomes even more important as investors are growing allocations to less liquid private equity and private credit markets. Fixed income had a high correlation to risk assets in 2022 when the Fed was tightening monetary policy and increasing rates.
In 2025, rates are likely to remain range-bound with the potential for slight declines in the Federal Funds rate. As such, relative spreads across fixed-income sectors will likely be a larger driver of returns, while duration will likely not contribute substantially to returns.
Deep fundamental research will assist investors in selecting the specific securities and sectors likely to outperform. In the high-quality market, Rodriguez finds municipals to be attractive, as well as securitized markets, including higher quality CLO tranches, mortgage-backed, and asset-backed securities. In the below-investment-grade sector, Rodriguez finds private credit, high-yield munis, middle-quality B- and BB-rated corporate bonds, leveraged loans, and BB and low BBB CLOS are attractively priced.
The financial sector is likely to benefit from expected deregulation, while power demands from data centers favor the utility sector. An expected increase in energy drilling could be challenging for the oil sector, but natural gas has a more favorable outlook due to growing electricity demand. Energy infrastructure, including pipelines and the electric grid, also has a favorable outlook.
Downside risks can be seen if the US economy moves into a recession, which would challenge risk assets and corporate credit. Another potential risk for the fixed-income market would be accelerating inflation, which could cause the Fed to tighten monetary policy.
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