Expectations of further European rate easing against a backdrop of sluggish growth bodes well for fixed income this year, two major investment houses argue.

Two of the largest asset managers - PIMCO and BlackRock - argue that European fixed income retains attractive features this year, as economic uncertainties make the asset class relatively appealing compared with other areas.  

These asset managers wield considerable market clout. PIMCO oversaw about $1.95 trillion in AuM at the end of December 2024; BlackRock - the world's largest asset manager by far - managed $11.6 trillion in AuM as of the same date. 

Despite sluggish growth, James Turner and Simon Blundell at BlackRock think the euro area remains resilient, and European fixed income remains appealing this year.

As inflation continues to fall, Turner and Blundell expect the European Central Bank (ECB) to move to a less restrictive monetary policy, with interest rates likely to fall to around 2 per cent by the end of 2025. Hence their belief that European fixed income remains attractive in this environment.

They said that European investors are expected to gradually reduce their cash holdings in the coming months. The combination of falling deposit rates, as the ECB cuts further, will increase the pressure to step out of cash, and lock in attractive yields on offer today. “A significant portion of this reallocation is likely to flow into credit markets, with corporate bond yields currently at multi-year highs,” the duo said. Turner and Blundell are co-heads of BlackRocks European fundamental fixed income at the firm. 

“Investors should look to step out of cash and increase allocations to fixed income to benefit from the higher yields and achieve a solid and predictable stream of income from a diversified portfolio of well-selected credit,” they said.

Nicola Mai, economist and sovereign credit analyst at the California-headquartered investment manager PIMCO, also noted that Europe's economy, particularly that of Germany, is struggling with stagnant GDP and structural issues such as lagging technology, high energy prices, and intense competition from China. "Political uncertainty further exacerbates the situation, leading to tighter bank credit standards. Last but not least, increased global trade uncertainty poses a significant headwind for Europe," she said in a note.

There are also positives for the region compared with a decade ago: the European Central Bank's (ECB's) ability to act as a lender of last resort, improved fiscal cooperation, and reduced Euroscepticism. Overall, Mai believes that the outlook presents significant opportunities for fixed income investors. She views European duration as attractive, particularly in the five- to 10-year part of the curve, while she tends to be underweight the long end of the curve due to increased sovereign issuance and reduced central bank support. "Having duration exposure in portfolios also offers significant upside in the event of more adverse global trade scenarios. Outside core duration, sovereign spreads to German bunds in the region are relatively tight from a historical perspective. However, we see more stability in this space compared to a decade ago, as the ECB has asserted its role as a lender of last resort for sovereigns," Mai said.

Favourable credit backdrop
BlackRock's Turner and Blundell think European credit is likely to remain a good source of income over the next 12 months, supported by strong fundamentals. While spreads are at the tighter end of historical ranges, all-in yields remain elevated, offering attractive opportunities for investors and driving demand.

Depending on where an investor wants to take risk, European credit markets offer an income opportunity. “In both high yield and investment grade credit, spreads have tightened, limiting the scope for spread compression. However, both asset classes may continue to provide opportunities to generate income,” they said.

Less enthusiastic about taking significant interest rate volatility, they prefer to stay in short-to-medium maturities as opposed to longer duration. Here are some of their specific views:

Strategies to watch
It is an opportune time to lock in higher yields through fixed maturity credit strategies: “Investors should also consider rethinking their bond income toolkit and exploring active, diversified, and flexible strategies to properly monetise higher-yielding credit opportunities in a risk-aware way.” 

1: European high yield
The strong technical picture is expected to persist, as elevated yields continue to attract investors while net new supply remains muted. Additionally, corporate fundamentals remain robust. Issuers have demonstrated pricing power through the inflationary cycle, and capital markets have allowed them to term out maturities effectively.

2: Fixed maturity strategies
Given expected rate cuts, the BlackRock due think it is an opportune time to lock in peak rates through fixed maturity strategies. Investments are made at the inception of the strategy and held until maturity to lock in yield and mitigate the impact of a potential decline in rates. Fixed maturity strategies offer the income predictability of a single bond or deposit, combined with the diversification benefits of a portfolio of holdings.

3: Multi-sector flexible high-income solutions
Today's broader bond universe may offer opportunities to reduce risk and increase yield by moving beyond core bonds, such as investment grade credit or government debt. In this context, investors may benefit from a more balanced allocation between core bonds and plus sectors, including high-yield credit, securitised assets, and emerging market debt.