The firm’s chief investment officer, Chris Iggo, said steeper yield curves are delivering higher carry in longer-dated bonds.
“Whether this is compelling enough to shift allocations in bond portfolios remains to be seen. If it does, growing concerns about credit will also be a significant part of the motivations for such changes,” Iggo said.
AXA Investment Managers noted that recent years have been challenging for long-duration assets in the bond market, however, this may now be changing.
“In the US, UK and Euro area government bond markets, longer duration has outperformed this year. That observation may not sit comfortably with the bond bears worried about debt level and excessive supply,” Iggo said.
He observed that based on current 10-year versus two-year government bond spreads, historical patterns suggest there will be positive returns from locking in the longer yield over the shorter.
“That reflects the additional carry from the longer end of the curve, but there is also the possibility that total returns are boosted by the whole yield curve moving lower (in a risk-off environment) or recent curve steepening reversing at some point. If yield curves keep steepening, the case for longer duration becomes even more compelling.”
Iggo also said that underweight positions in credit and long duration have not been the consensus stance.
“Valuations alone suggest that strategy is worth considering, especially if investors do get more concerned about credit issues. There is certainly more borrowing by technology companies taking place, through public debt issuance but also through private credit vehicles. There is more merger and acquisition activity,” he said.
He added that forecasting sustained high real returns in public markets is becoming increasingly difficult.
“Equity and credit market valuations are expensive, US and UK inflation has been above target since 2020, public debt issues are suggesting an era of fiscal dominance with potential currency debasement, and there are lots of well-known macro and political risks.”
AXA Investment Managers also noted that alternative asset classes continue to attract capital by offering different risk-return profiles.
“Hedge funds strive to deliver uncorrelated (and high) returns through combinations of high frequency, complex and leveraged investment strategies,” Iggo said. He pointed to private credit as a potential source of higher returns, albeit at the cost of liquidity.
“If news suggests credit problems, even in the opaque parts of the market, then liquid markets will get hit. The good news is that in the current earnings round for US companies, banks have not raised any red flags on credit quality or loan losses,” Iggo said.
“It should be noted, however, that following renewed concerns about US–China trade relations, spreads have widened. This may be temporary but the likely evolution of spreads over coming months is probably skewed towards widening.”
According to Iggo, the main concern in public markets right now is valuation.
“The stark truth is that the return outlook is not great – depending on the time horizon, barely any real return in US equities over the next 10 years, and barely any excess returns from fixed income credit classes over the next five years.
“When there are widespread concerns over valuation, it does not take much to convince investors to become more risk averse. I would not be surprised if we go through a seasonally typical increase in volatility in the weeks ahead.”
AXA Investment Managers pointed to the broader macro environment, where credit spreads remain tight, equity valuations are stretched, and economic growth is expected to be modest. The International Monetary Fund is forecasting projected growth in advanced economies to hold at 1.6 per cent for both 2025 and 2026, with the US forecast hovering around 2 per cent.
“In this environment, a more defensive positioning may be warranted – and longer-duration bonds could play a role in that strategy. Should markets enter a risk-off phase, this trade has the potential to perform well,” Iggo said.
PIMCO also sees advantages for investors with exposure to duration.
“Even after the strong year-to-date performance for bonds, yields on US 10-year Treasuries remain well within the 3.75–4.75 per cent range that’s served as an anchoring reference point over the past couple of years. Forward curves generally price central banks returning to the range of neutral policy rates – although with the UK an important exception, with the market still pricing in a terminal rate well above our neutral estimate range.”
PIMCO economist Tiffany Wilding said today’s bond yields offer a compelling opportunity to support income, returns and potential price appreciation across a variety of economic scenarios.
“The fixed income opportunity is especially timely with central banks globally poised to cut interest rates further,” Wilding said.
Starting yields have historically been a strong predictor of five-year returns. As of 26 September 2025, the Bloomberg US Aggregate Index yield stood at 4.42 per cent and the Global Aggregate Index (US dollar hedged) yield was 4.73 per cent.
“From this baseline, active managers can seek to construct portfolios potentially yielding about 5–7 per cent by capitalising on attractive yields available in high grade investments,” PIMCO’s CIO of global fixed income, Andrew Balls, added.
“As central bank policy rate cuts continue, steepness is returning to the front end of bond yield curves. Bonds appear poised to outperform cash, while active management can improve outcomes through yield curve positioning.”
Balls said that in a climate of ongoing policy uncertainty, diversified investments and portfolio resilience are key.
“Fixed income valuations are attractive both in absolute terms and relative to equities, which have climbed to historically lofty levels. Bond allocations remain an anchor for investment portfolios, providing stability and a potential hedge against elevated equity market risks.”
