Winds of change 2025: spotting opportunities after peak yields

Franklin Templeton analysts assess the outlook for the US fixed income market and emerging and developing market debt, as the tariff war ramps up. 

Tariffs raise the cost of imported goods and, depending on their magnitude, can contribute directly to domestic imported inflation in the United States. If affected countries implement retaliatory trade measures, it could increase inflation and hinder export growth.

Franklin Templeton has the greatest concern for markets with dual vulnerabilities of high revenue exposure to and dependence on the United States as an export market. Capital inflows to emerging markets would be generally welcome, as it appears that sovereign debt issuance is likely to rise.

Meanwhile, the global monetary policy tightening cycle has run its course, and most major central banks in developed markets have started cutting interest rates.

With regard to investment  in the US, Franklin Templetin believes in a cautious approach to extending Treasury duration. The term premium has already expanded quite materially, particularly since the start of the Fed’s rate-cutting cycle in September 2024.

However, though Franklin Templeton analysts assess the risks of a US recession to be low, some studies indicate that since the September 2024 Fed meeting, foreign official institutions have meaningfully reduced their dollar reserves.