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Inflation in the US and Europe is developing favourably and further interest rate cuts by the central banks are on the cards. However, the outlook remains extremely uncertain. Above all, it is unclear what tariff policy the US government will pursue and what impact it will have on prices. “Against this backdrop, we favour medium to short maturities for the US, while high-yield bonds also offer attractive returns for many investors,” explains Thorsten Fischer, Managing Director and Head of Portfolio Management at Moventum AM. In the emerging markets, too, attractive interest rate premiums with reduced risk are often tempting.

The all-clear on the price front: in the US, the inflation rate is moving towards the central bank’s target of two per cent – even if the downward trend has recently stalled at 2.4 per cent. Core inflation (most recently 2.8 per cent) continues to be driven by housing costs. The big question is how import tariffs will affect prices. So far, this effect has been limited to inflation expectations, which have reached 5.0 per cent on a one-year horizon according to a survey by the University of Michigan. “In the USA, market participants should prepare for a renewed rise in inflation in the coming weeks,” says Fischer. “It is therefore advisable to focus more on inflation-protected investments or to invest in companies that have high pricing power and are therefore in a position to pass on increased costs to consumers.”

The US central bank, the Fed, is taking a wait-and-see approach in view of the lack of clarity, although hopes of further interest rate cuts have recently received a boost, which has depressed bond yields. US President Trump is continuing to put pressure on the Fed to loosen its monetary policy. Within the Fed, more and more voices are being raised in favour of a rate cut as early as July – however, the markets have so far been assuming a rate cut in September. “The long end of the US yield curve is currently characterised by high volatility,” says Fischer – partly due to rising government debt, which is likely to increase significantly in the coming years. Fischer: “Against this backdrop, we favour positioning in the ‘belly’ of the yield curve (three to five years) or at the short end (one to three years).”

Premiums on US high-yield bonds have fallen significantly since the tariff shock of Liberation Day at the beginning of April. “This reflects the still predominantly robust fundamental condition of the issuing companies,” says Fischer. The current yield level of around 7.4 per cent in the high-yield segment offers a certain risk buffer against possible widening spreads or rising interest rates. The situation is different with US investment grade bonds. Here, investors should select shorter maturities or actively manage the duration in order to limit the interest rate risk.

Inflation is also developing favourably in the eurozone. In May, it fell below the two per cent mark for the first time in a long time, and even the core rate (most recently 2.3 per cent) continued to approach the ECB’s two per cent target. The recently published figures from Germany underpin this trend – here, too, inflation has fallen back to 2.0 per cent. A sharp rise in the near future seems unlikely, partly because a continued appreciation of the euro would make imports cheaper. China’s attempt to sell its excess capacity in Europe in the event of an escalation of the tariff war with the USA is also likely to have an inflation-reducing effect. Further deflationary tendencies in the eurozone could come from low energy prices and a moderate rise in unemployment as a result of a slight economic slowdown in the wake of high tariffs. “We therefore see a high probability that key interest rates in the eurozone will fall below two per cent by the end of the year,” explains Fischer.

In the case of euro government bonds, the current risk/reward profile of German government bonds remains manageable from an investor’s perspective. Inflationary momentum is moderate, while at the same time the expansionary fiscal policy is likely to lead to rising debt, which will put upward pressure on the long end of the yield curve in particular. Against this backdrop, a further steepening of the yield curve is to be expected. “We therefore believe it makes sense to focus on shorter maturities for German government bonds,” explains Fischer. Long-term investments, however, are currently only justifiable with increased caution.

The situation in the euro corporate bond segment has also calmed down since ‘Liberation Day’, spreads have fallen and the market considers the fundamental condition of many companies to be solid. In the high-yield sector, yields are attractive for many investors, while the investment-grade segment looks rather unattractive in relation to government bond yields. “We currently see a more favourable risk/reward ratio in the European high-yield sector than for investment grade exposures,” explains Fischer. “Selective positioning in high-quality, solid high-yield issuers therefore appears worthwhile in our view.”

Emerging markets also offer investors a number of opportunities. Real yields are attractive in many cases, while currency gains due to the recent weakening of the US dollar are also supporting the investment environment. Corporate bonds from emerging markets often offer higher risk premiums than their counterparts from industrialised countries, although they are often characterised by comparatively solid fundamentals. Nevertheless, the asset class as a whole remains heavily dependent on the development of US government bond yields, as rising Treasury yields can tend to have a negative impact on capital flows and financing costs in the emerging markets. Fischer’s conclusion: “Local currency bonds from emerging markets offer attractive real yields and potential currency gains. A targeted selection of countries with solid fundamentals – such as Brazil or Colombia – seems particularly sensible. At the same time, we consider active risk management to be essential in order to be prepared for possible increases in yields on US government bonds.”