Baillie Gifford: The US dollar may strengthen further, and any short-term weakness will create buying opportunities

According to the Zhitong Finance APP, Steven Oh, Global Head of Credit and Fixed Income at Pictet Asset Management and Co-Head of Leveraged Finance, released the 2025 Fixed Income Outlook. Steven Oh stated that stimulative fiscal policies will exacerbate short-term inflationary pressures, leading the Federal Reserve to reduce the extent of its easing policies and causing the yield curve to remain at recent highs. This "distorted" curve is expected to persist until 2025. In contrast, given the relatively weak economic outlook in Europe, the European Central Bank will be able to steadily cut interest rates. The US dollar may strengthen further.

Pictet's baseline scenario predicts a rare non-recessionary rate-cutting cycle, which will support credit market performance in 2025, particularly in leveraged finance assets. A Republican sweep in the US elections will drive more growth-promoting policies, further supporting risk assets from a fundamental perspective. However, more restrictive trade policies may pose challenges for regions outside the US.

Pictet noted that despite favorable fundamental factors, they are offset by overvaluation, which fully reflects the market's overly optimistic sentiment. Therefore, Pictet believes it is advisable to adopt a balanced strategy in portfolio risk allocation, maintaining a neutral position closer to the benchmark while continuing to focus on selected securities to capture the differing prospects among issuers.

Steven Oh stated that the default rate on high-yield bonds has peaked in this cycle and is expected to decline, while the default rate on leveraged loans (including liability management operations) is expected to remain near historical averages. Due to higher total yields, the demand for collateralized loan obligations (CLOs) is strong, supporting loan demand and market technicals.

In terms of investment-grade credit and interest rates, Pictet expects that any short-term weakness will create buying opportunities. Compared to investment-grade credit, the bank is more optimistic about the valuation of mortgage-backed securities. Although emerging market bonds can serve as a tool for diversification, their valuations are not particularly cheap. Under the upcoming "America First" policy, emerging markets (especially Mexico) and even Europe may face trade policy challenges, but the resulting sell-off may create buying opportunities for credit assets in neighboring regions, such as broader Asian investment-grade or high-yield bonds, as well as a wider range of emerging market investment-grade bonds relative to developed markets