Bond markets 2025: Soft landing or new setbacks?

Against the backdrop of geopolitical tensions this year and the numerous important elections, the biggest surprise from a bond market perspective is the lack of major volatility. Inflation has generally developed well and was in line with expectations. However, other macroeconomic data fluctuated a little, leading to movements in interest rates as the market had a different view on the speed and extent of further rate cuts. Overall, US and Norwegian interest rates have risen slightly year-on-year, while Swedish and European interest rates have fallen slightly. The soft landing scenario continued to dominate market reporting and the relatively favorable economic developments were more important than the increasing geopolitical uncertainty, resulting in fairly strong equity and credit markets. Credit spreads have largely normalized and volatility has been quite low.

Few signs of recession

As was the case at the start of 2024, it is not difficult to find areas of concern when looking ahead to 2025. Geopolitical risks will always remain and could even increase with a new and untested administration in the US. The world will have to adjust to possible new trade and domestic policies in the US, and in Europe, German elections are due in early 2025. On the positive side, inflation is likely to continue to moderate, providing scope for further interest rate cuts in both the US and Europe. Economic growth will be moderate in the US and quite weak in Europe, but there are few signs of recession. In this scenario, interest rates could remain range-bound or even fall slightly. Credit spreads could remain quite tight, leading to decent bond performance. However, the scope for a further significant narrowing of credit spreads is quite limited.

Negative correlation between bonds and equities is back

We believe that the negative correlation between bonds and equities has returned, and we saw clear signs of this in the summer of this year. In this environment, economic growth and not inflation is the main risk for equities and bonds, which therefore once again represent a good diversification of equity risk.

The Nordic bond markets have performed quite well in 2024, both in the investment grade and high yield segments. In addition to the general factors already mentioned, the Nordic markets have also benefited from a fairly short duration and a high proportion of floating rate bonds. Floating rate notes (FRNs) have performed well in a market with relatively stable interest rates and inverted yield curves. If the pace of rate cuts by central banks remains moderate (i.e. no recession), FRNs could continue to perform well in 2025. We also believe that real estate bonds will continue to perform well in this environment.