Seek durable income
Quality fixed income remains an important part of portfolio diversification for investors, providing liquidity, income, and portfolio stability.
 Bond yields have increased on growth optimism after US tariff reductions. While yields could rise further if fiscal deficits increase, we believe current levels offer an opportunity to lock in durable portfolio income and expect central banks to intervene if yields rise unsustainably. High grade and investment grade bonds offer attractive risk-reward, in our view, and can hedge downturns. We prefer medium-duration bonds due to fiscal risks at the long end. Higher yields and wider credit spreads have improved the outlook for riskier credit; for now, we prefer diversified income strategies, including across senior loans, private credit, equity income, and higher quality credit.
High grade and investment grade bonds
High grade and investment grade bonds
High grade and investment grade bonds offer appealing risk-reward, in our view. We believe yields on quality bonds in most major markets are attractive, and we anticipate the continuing global rate-cutting cycle will contribute to investor inflows. We also continue to see government bonds as a credible alternative to cash for investors looking to lock in currently elevated yields.
We expect mid-single-digit returns for medium-duration quality bonds in US dollar terms over the next 12 months. We expect these returns to come from both yield and capital appreciation.
Investment grade bonds are also appealing from a risk management perspective, in our view, especially as economic growth slows. We see an opportunity for investors to switch cash into high-quality bonds to lock in yields, dampen overall portfolio volatility, and provide additional robust income.
Diversified portfolio income strategies
Diversified portfolio income strategies
Higher yields have improved the outlook for riskier credit. Unless a severe recession occurs, corporate fundamentals and low leverage levels suggest default risks are likely to be contained at the index level. Absolute yields of 7.8% for US and 5.9% for EU high yield should attract capital flows.
Complementing quality bonds with select short- and medium-duration riskier credit investments, such as high yield, emerging market bonds, or senior loans, can enhance diversification and returns.
Senior loans
We anticipate senior loans to deliver mid-single-digit returns in 2025, primarily driven by coupon income. Yields on US and European loans remain elevated at around 9.1% and 7.1%, respectively. We believe leveraged loans suit scenarios with resilient growth and gradual rate cuts, which should limit distressed company growth. Investors may benefit from above-average coupon income.
Private credit
Private credit remains an attractive addition to long-term portfolios, especially senior upper-middle market and sponsor-backed loans, which have shown resilience to rising defaults. We expect high-single-digit to low-double-digit returns for private credit in 2025, offering higher yields than listed fixed income peers. Historically, private credit has exhibited lower sensitivity to interest rate volatility, potentially providing portfolio diversification, and benefits from strong covenants and diversified borrower bases.
Equity income strategies
Investors seeking income might consider equity income strategies, including high dividend, dividend growth, or yield-generating structured investments. Structures such as put writing and covered call writing can enhance income potential by harvesting volatility premia, diversifying portfolio income sources, and may be treated as capital gains in some jurisdictions. We estimate that mixing high dividend, dividend growth, and option strategies could deliver a total yield of around 5-7% per year. Options do carry unique risks that investors must be aware of before engaging in them.