Monetary Policy

The Bank of England (BoE) delivered a widely expected 25bp cut on Thursday, taking interest rates to a two-year low of 4%. But the real story was in the balance of views on the Monetary Policy Committee (MPC), which for the first time in its 28-year history had to conduct two rounds of voting and has forced markets to reassess the path of future rate cuts.

The turbulent start to 2025 has sent many investors seeking alternatives to US assets, but in our view European fixed income can offer more than just diversification.

Softer US economic data means the pressures on UST yields now look more balanced, but headlines around President Trump’s pick for the next Fed chair are just one reason investors should expect rates volatility to continue.

Recent market volatility has reinforced the value of alpha over beta. While markets rebounded from recent lows, risks persist – from uncertain trade policy to concerns about debt sustainability. But fixed income remains resilient. We are finding opportunities in local currency EM debt, US high yield, and European investment grade credit.

The US dollar’s reign is faltering, and we believe a prolonged dollar bear market is underway – a scenario that has historically been a tailwind for emerging market economic growth and asset valuations. However, not all emerging equity markets respond equally to the dollar’s decline.

The European Central Bank (ECB) will be alone this week in delivering its latest monetary policy decision, with the next Federal Reserve, Bank of England and Bank of Japan meetings not until the week commencing June 16.

Thus far in 2025, the prevailing and overriding topic of conversation amongst economists and market participants has been tariffs and what they might mean for the global macro outlook.

The question for investors now is how much of the macro risk remains, and how well that risk is being reflected in asset valuations.

With the recent economic spotlight dominated by President Trump’s rhetoric and Germany’s blockbuster fiscal expansion plans, Wednesday brought the UK back into focus with the latest round of inflation data and the Spring Statement from the Chancellor, Rachel Reeves.

Volatility in Bunds seems to have calmed down slightly in the last few days as markets continue to digest huge fiscal expansion plans from Germany and the European Union. At the same time, many forecasters have been downgrading their US growth projections after reassessing the level of pain President Trump seems willing to inflict on the US economy in order to implement his policy agenda.

We remain cautiously optimistic about Fixed Income returns. Tail risks are elevated, which dampens our confidence in “risk on” markets. But alpha opportunities still await risk-aware, active investors. Those who try to predict the next major macro shift may find themselves echoing Luke Skywalker’s words, “your overconfidence is your weakness.”

Overnight, the CDU/CSU (the winner of the latest German election) and the SPD (the leader of the current parliament set to end on March 25) announced Germany’s largest fiscal policy shift in decades.