As we enter 2025, investors are navigating a shifting landscape shaped by evolving central bank policies, economic uncertainty, and fiscal dynamics. While challenges remain, there are also opportunities on the horizon.

Charlie Jamieson, Chief Investment Officer, explores the key themes set to influence bond markets this year from interest rate movements to government spending and policy direction. Below is a brief summary.

Summary of key themes for bond markets in 2025

Recap of 2024: The bond market faced underwhelming performance despite global rate cuts. A key driver of this was a sell-off in long-dated bonds, spurred by expectations of continued US fiscal spending. In Australia, the Reserve Bank of Australia (RBA) held interest rates steady throughout 2024 but is expected to begin cutting in February 2025, which should provide support to bond markets given current valuations.

Global economic outlook: The outlook for 2025 remains divided, particularly with the Trump administration now in its second term. The US economy continues to perform well, spurred on by the "Trump effect" of strong business optimism. However, economic conditions in the rest of the world are weaker, with Europe, Canada, Australia, and New Zealand all expected to cut rates further.

Policy uncertainty: While markets had hoped for more clarity, there is still little certainty around economic policy direction. A major area of concern is the potential for increased tariffs, which could reintroduce inflationary pressures. Although not yet confirmed, the expectation is that tariffs will be implemented and may rise throughout the year. This, combined with Trump's stated preference for lower inflation and interest rates, creates a complex policy landscape that could have significant market implications.

Fixed Income performance^: For fixed income investors, returns are expected to be relatively solid. Cash returns should remain in the 3-4% range, while bond market performance could reach 5-6%, depending on yield movements.

Government spending and fiscal policy: In both the US and Australia, public sector spending has been a major driver of economic activity. However, with concerns over inflation and fiscal sustainability, there is increasing pressure to rein in spending.

As investors navigate 2025, market divergence, policy uncertainty, and fiscal decisions will be key factors shaping the bond market outlook.

^ Recipients should not rely on this information in making investment decisions. The information here is illustrative and shall not be relied upon as a promise or representation of past or future performance. All investments contain risk.

Charlie Jamieson, Chief Investment Officer