US investment manager BlackRock released this week its fixed income outlook for the third quarter of 2025 highlighting why it thinks the fixed income landscape provides a generational opportunity for bond allocations.

With the potential to achieve consistently high levels of income, and with contained drawdowns, BlackRock believes that the fixed income landscape provides a generational opportunity for bond allocations, particularly given its income recognition and stability in this uncertain landscape.

Although the firm thinks that the US is unlikely to be displaced as the global hub of innovation, and the economy is positioned to remain resilient over the intermediate term, the short-term picture may be bumpy.

Fund flows show that global investors are starting to question the strength of the US and diversify away from US assets, BlackRock said. It highlighted how the year started at an all-time high for non-US investors holding US investments.

“We expect this reallocation of capital to be a gradual shift that continues with certain key drivers of the global macroeconomic landscape pushing in that direction,” Rick Rieder, chief investment officer of global fixed income, said.

The trend of diversifying away from US assets has been under way for some time in the wealth and asset management sector, encouraged by developments such as US President Donald Trump's tariffs. See this item from Asset Risk Consultants in early April.

Opportunities in European fixed income
The risk-averse nature of the largest investors in US fixed income means that European fixed income is set to benefit more than Asian or emerging markets as stability is a key consideration, the firm continued. “We anticipate growing divergence between leaders and laggards and see plenty of opportunities in the European fixed income universe across macro and credit markets,” the firm said. “We see an opportunity in ultra-long euro curve steepeners, where we expect upward pressure on the long end of the curve due to the normalising of the risk-free curve amid the cutting cycle and medium-term regulatory changes coming from Dutch pension fund reform.”

European liquidity is sufficient and it is expected to improve further as a result of the increased issuance expected from governments in the region. “We are also seeking opportunities in sectors relatively insulated from tariffs, with bank debt remaining our preferred risk expression,” the firm continued. “European banks delivered solid results in the first quarter, affirming fiscal year 2025 guidance. However, some banks with large corporate loan books and US consumer exposure took precautionary provisions or missed consensus, underscoring the importance of security selection.”

Within large parts of the fixed income universe, the firm said that duration is no longer the reliable hedge it once was. Given today’s macro backdrop, the firm doesn’t expect that to change. Still, with the US Federal Reserve likely to keep rates above neutral for longer, debt markets are offering historically high income levels to investors once again. In this environment, the firm believes that investors should prioritise income over duration. Yields across the board have rarely been this high, especially at the front end, giving investors the chance to earn very attractive returns from high-quality borrowers with little duration risk.

The firm also sees more value for hedging efficacy in shorter maturities (when using leverage to equate the percentage impact on a portfolio) and global opportunities versus traditional long-end US fixed income.

Amidst the tariff turmoil, David Zahn at California-headquartered Franklin Templeton is also positive about the outlook for fixed income in Europe for the rest of this year. In particular, he sees opportunities in short-duration assets.

New research from BNY Investments also shows that UK financial advisors are deploying fixed income investments both to protect client portfolios against a complex market backdrop and drive returns. See more commentary here and here.