Skip to content

CONTRIBUTORS

Sonal Desai, Ph.D.

Chief Investment Officer,
Portfolio Manager

Nikhil Mohan

Economist, Research Analyst
Franklin Templeton Fixed Income

Angelo Formiggini

Economist,
International Research Analyst

Patrick Klein, Ph.D.

Director of Multi-Sector Strategy,
Portfolio Manager
United States

John Beck

Director of Global Fixed Income,
Portfolio Manager
United Kingdom

David Zahn, CFA, FRM

Head of European Fixed Income,
Portfolio Manager
United Kingdom

Executive Summary

Since our last publication, we have upgraded our view on both the US and euro area (EA) economies, and we are no longer projecting a technical recession in the former. Where we break from market consensus is in our view on the US Federal Reserve’s (Fed’s) path to monetary policy normalization. The market appears to be confident in the Fed’s ability to orchestrate a “soft landing” that would allow the Fed to cut interest rates throughout next year. We feel the trajectory of disinflation in both the United States and EA will flatten—primarily due to wage pressures stemming from record low unemployment—and central banks are thus likely to keep rates higher for longer.

Spreads in fixed income sectors are pricing in a quite sanguine environment, with levels leaning toward long-term averages, much tighter than previous periods of stress. We retain the view that both active portfolio management and superior security selection will be the main drivers of returns for investors.

In this issue we cover:

Macroeconomic themes

  • Economic conditions have remained resilient
  • Wages remain a driving factor for inflation
  • Upbeat employment expectations

Portfolio themes

  • Interest-rate carry adds to performance
  • Being mindful of yield curve positioning
  • Market conditions have turned positive

US economic review

  • More questions than answers

Euro area economy

  • The labor market remains center stage

Special topic: Making a case for active corporate bond portfolio management

We believe skillful active management of corporate credit portfolios can potentially enhance performance and help offset the risk and return volatility associated with passive investment vehicles, including index exchange-traded funds (ETFs), over the long term.

WHAT ARE THE RISKS?

All investments involve risks, including possible loss of principal.

Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.

Asset-backed, mortgage-backed or mortgage-related securities are subject to prepayment and extension risks.

International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.

Investments in technology-related industries carry much greater risks of adverse developments and price movements in such industries than investing in a wider variety of industries.

Changes in the financial strength of a bond issuer or in a bond’s credit rating may affect its value. High yields reflect the higher credit risks associated with certain lower-rated securities held in the portfolio. Floating-rate loans and high-yield corporate bonds are rated below investment grade and are subject to greater risk of default, which could result in loss of principal—a risk that may be heightened in a slowing economy.

Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton.

The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.

Important Legal Information

This document is for information only and does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. This document may not be reproduced, distributed or published without prior written permission from Franklin Templeton.

Any research and analysis contained in this document has been procured by Franklin Templeton for its own purposes and may be acted upon in that connection and, as such, is provided to you incidentally. Although information has been obtained from sources that Franklin Templeton believes to be reliable, no guarantee can be given as to its accuracy and such information may be incomplete or condensed and may be subject to change at any time without notice. Any views expressed are the views of the fund manager as of the date of this document and do not constitute investment advice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. 

There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. Franklin Templeton accepts no liability whatsoever for any direct or indirect consequential loss arising from the use of any information, opinion or estimate herein.

The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance.

Copyright© 2025 Franklin Templeton. All rights reserved. Issued by Templeton Asset Management Ltd. Registration Number (UEN) 199205211E.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute.