投稿人
Christy Tan
Investment Strategist
Franklin Templeton Institute
Lukasz Labedzki, CFA
Senior Analyst
Franklin Templeton Institute
This report leverages the Franklin Templeton Institute’s US Fixed Income Navigator (FIN) to analyze historical data and offer insights on managing broad fixed income portfolios in today’s volatile environment.
The Appendix Methodology toward the end of this report provides descriptions for over 20 indicators for the LYVFE framework categorized into five groups: Liquidity, Yield Curve, Valuation, Financials and Economic Momentum.
Investment implications
For investors looking to diversify their portfolios away from equities and cash-like instruments, as well as those already exposed to fixed income, we believe the following strategy is warranted:
US Treasuries: We maintain our view that focusing on the short-to-intermediate part of the curve remains the most prudent approach for the majority of conservative mandates. While the risk/reward profile for duration has clearly improved—supported by slowing US growth—there are many factors, such as volatile inflation expectations, concerns around future foreign demand and unresolved issues related to rising deficits, that make our approach a bit more cautious. Notably, real yields remain relatively high, which is why we favor inflation-linked bonds.
US credit: We believe the recent widening of credit spreads presents opportunities for bond investors, particularly in the high-yield space. Our investment teams see the most compelling cases there. The overall risk profile of the high-yield market has improved over time, suggesting that future spread expansions may be more contained compared to past episodes. All-in yields seem attractive to us—currently averaging around 8%1—and historically, such levels have been a solid predictor of strong forward returns for investors with a reasonable time horizon.
Europe: We hold a neutral view on European fixed income following historic announcements of fiscal programs. While our models indicate that benchmark 10-year German bonds are cheap relative to their fair value2, we remain cautious. A likely increase in bonds available in free float could justify a premium. There may be an opportunity for European debt stemming from potential capital reallocation into the region, but we believe yields need to be somewhat higher to attract broader investment.
Emerging markets debt (EMD): We see reasons for optimism in EMD. We base our view on the improving risk profile of the segment, with many issuing countries showing greater resilience to external shocks. This resilience, combined with a yield advantage, creates what we consider an attractive opportunity for investors with a reasonable time horizon. That said, the market is far from homogeneous and understanding country-specific factors will be critical.
Fixed Income Navigator (FIN) highlights
Our latest reading of the FIN model, based on the US investment-grade market, remains in positive territory. The model reflects a mix of forces—with a net effect still tilting positive—including deteriorating economic sentiment, some flight to safety and improved credit valuations on one hand, and inflation concerns and the lack of a clear trend in US Treasury yields on the other. In our view, the model output is an important indicative signal that allows for broader discussion—especially now, with so many moving parts in the market requiring deeper analysis.
Exhibit 1: US Fixed Income Navigator Dashboard (LYVFE signals)
April 2025 Update
Source: Franklin Templeton Institute. For Illustrative Purposes Only.
Given the turbulent market environment, we believe it is useful to share a few guidelines for bond investors. These focus on thoughtful diversification (both across asset classes and, importantly, within fixed income markets), being aware of the Federal Reserve’s (Fed’s) reaction function, understanding what’s currently priced in, having a solid grasp of fundamentals and utilizing volatility to your advantage
Conclusion
We think it’s time to stop thinking about fixed income solely through the prism of the US Treasury market. It should be viewed as a broad asset class offering diverse income opportunities. The current environment also strengthens conviction that income—rather than price gains—is likely to be the core driver of total returns.
In the US Treasury market, the risk/reward profile has improved given the US growth slowdown. However, for the majority of conservative mandates, an allocation focused on the short to intermediate part of the curve may work best for now, given the many unresolved concerns that are putting upward pressure on the risk premium required from government bonds—particularly those with long duration—which is leading to a steepening of the yield curve. Once we see clearer signals of a more meaningful turn in hard data, it will be time to consider extending portfolio duration, but we will likely not deviate too far from the intermediate part of the curve.
We see many yield opportunities in the corporate space and in select emerging markets. We also believe it’s likely that current conditions could make European debt a more prominent part of international portfolios—a potential tailwind for the sector. That said, it will take time, as we believe current government bond yields are arguably still too low to attract sizable foreign capital flows.
EndNotes
- Source: Bloomberg. as of April 30, 2025. Yield to worst for the Bloomberg US Corporate High Yield Index. 7.9%.
- Fair value of government bond yields refers to the yield level implied by a regression model using fundamental data that historically explains yield movements well. It represents the yield level justified by those underlying fundamentals.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Diversification does not guarantee a profit or protect against a loss.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility.
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