Despite plenty of geopolitical and market volatility, the investment manager has argued that the current "muddle through" scenario has ultimately proven beneficial for fixed income markets.
In its Q4 fixed income outlook, PGIM contended that after the 2022 sell-off left yields at respectable levels, this has presented in a unique outcome: a potential long-term bull market sustained primarily by income accrual, rather than a brief one driven by a rapid yield decline.
Speaking to InvestorDaily, chief investment strategist for fixed income and head of global bonds at the firm, Robert Tipp, said PGIM anticipates the asset class to continue delivering sustainable returns.
“Looking ahead, the trend of the fixed income market providing solid returns - especially the higher yielding sectors like high yield and hard currency emerging markets - seems set to continue, possibly receiving a tailwind from Fed easing.
“In terms of duration, full market benchmark-based actively managed strategies are best positioned to capture the full range of opportunities in the market in the intermediate duration space,” Tipp said.
In contrast to the first half of this year, when short-term yields fell and long-term yields rose, he explained that things have changed in the home stretch of 2025. According to the report, long yields in the US appear to have peaked, and are now moving in tandem with short rates. This, in turn, carries bullish implications for other Western markets.
Meanwhile, PGIM expects the trend of compressing credit spreads to continue, albeit at a more moderate pace due to already tight spreads, indicating a "carry market" for investors.
At the same time, the report outlined two possible negative developments that could see the current income-driven bull market become about falling yields again - with inadvertently positive results.
The first, termed "Fed capture," anticipates a significantly more dovish approach from the Fed's management, leading to a reduction of 100 basis points or more in the short-term rate compared to previous forecasts.
However, the report argued that while the longer-term inflationary effects of this scenario are uncertain, a dovish stance on rates would likely lead to a lower and steeper yield curve in the short to medium term. This, in turn, would accelerate the bond bull market for the time being.
The second scenario is the potential downshifting of the US employment picture, but with the current US government shutdown creating a data void at present, the report noted that the precise situation is unclear.
Despite this, going by the latest ADP data - which found private employers shed 32,000 jobs in September - the report acknowledged a potential contraction, rather than expansion, in the job market at present.
As PGIM explained, a sustained labour downshift could prompt Fed funds pricing to drop to the more “accomodative” 2 per cent realm, which would also bring about marginally bullish ramifications for other Western and emerging markets.
“The combination of weakening employment growth, a potentially more dovish lineup on the Fed’s open market committee, as well as evidence that tariffs are having a limited and temporary impact on inflation - any one of these factors could push yields lower and add a tailwind to bond market returns,” Tipp told InvestorDaily.
Meanwhile, although spreads remain tight, the asset manager stated that it expects positive technical and fundamental factors to support continued incremental excess returns from both
public and private credit products.
Additionally, Tipp argued the appeal of cash is likely to dim in the months ahead as the Federal Reserve cuts rates. The US central bank cut rates at its latest meeting last week and is widely expected to do so again at its December meeting.
“The prospect of sub-par returns from cash may spur flows into long-term assets like stocks, and especially bonds, improving what is already a strong technical backdrop for both fixed income and equities,” he said.
This is especially true given that money market fund (MMF) balances are sitting at record levels, and returns since the Fed funds rate topped 4 per cent have been almost as good as long-term high-grade bonds.
Overall, PGIM acknowledged potential long-term risks, particularly of "Fed capture" over time, but maintained a low probability for this scenario given the uncertainty of further rate cuts in 2026.
It remained guardedly optimistic about its base case of a “muddle through” scenario and maintained its “yield is destiny” ideology. This has stated bond yields on offer today are attractive as the market’s yield over a decade is highly correlated with the subsequent realised return.
“The yield-is-destiny theme continues to be driven by the generous yields across markets and may pick up steam if US economic weakness or a Fed capture scenario adds to the downward pressure on rates,” concluded the report.
