Key Takeaways
- The ECB’s rate cuts and rising long-term bond yields have made valuations attractive in Europe.
- With the dollar weakening against the euro, it is preferable to maintain limited currency exposure.
- Bonds are cheap relative to equities, suggesting competitive risk-adjusted returns in the coming years.
To find value, investors need to look to Europe, according to Robert Tipp, chief investment strategist for fixed income at PGIM and co-manager of the PGIM Absolute Return Bond fund, which has a Morningstar Medalist Rating of Silver and four stars.
The winning ingredients of Europe are “solid macroeconomic fundamentals” and “highly attractive yields,” a mix that is “perhaps the best combination among its peers,” says the fund manager, who has extensive experience in the bond market, dating back to before he joined PGIM in 1991.
With equity markets at record highs, fixed income is in a “strategic buy zone,” but Tipp believes active management is needed to seize opportunities in a confusing geopolitical environment. We asked him about his strategy in the global bond market and whether now is the time to increase exposure to bonds.
Why Is European Fixed Income Attractive?
Sara Silano: Let’s start with Europe. PGIM believes there is value there. Why?
Robert Tipp: Europe offers a broad and deep opportunity set for adding value through active management, supported by strong macroeconomic fundamentals and highly attractive hedged yields – perhaps the best combination among its peers. For institutional investors, the relative value proposition of Eurozone debt is compelling.
The ECB’s rate cuts have brought the policy rate down to 2%, while longer-dated debt yields have risen throughout 2025, resulting in attractive valuations and leading to materially steeper yield curves than those observed in the US. Additionally, attractive spread opportunities exist in peripheral sovereigns, as well as the corporate bond space. Spreads are tight but are nonetheless attractive relative to other developed markets.
We Prefer High-Quality Bonds
Silano: Looking at your absolute return strategy on global bonds, what is your positioning along the yield curve, both geographically and in terms of credit quality?
Tipp: PGIM Absolute Return Bond Fund seeks to leverage the firm’s top ideas by investing across global fixed income assets and currencies, while maintaining a cash-like duration profile.
In an environment of tight credit spreads and elevated macro risk, the fund has been migrating to higher quality credits, with 23% in investment-grade corporates, 19% in high quality securitized, and 14% in US government bonds. High yield accounts for 9%, primarily BBs, and Bs, with minimal exposure (1.5%) to CCCs and below. The majority of the fund is invested in the United States (54%), followed by 20% in Europe.
Duration positioning in the current range bound market has been tactical, but overall close to neutral, using derivatives to hedge the duration of longer-maturity fixed rate credits. We have had a yield curve steepening bias, and maintained a low risk profile in currencies, modestly long high-carry currencies [with higher interest rates] and short low-carry Asian currencies, as well as a small US dollar underweight.
Limit Exposure to Other Currencies
Silano: With the dollar weakening against the euro over the past year, is it better for a European investor to hedge currency risk?
Tipp: Given the low information ratio associated with currency risk, our bias is to keep currency exposures at a low level. For investors, this would suggest keeping exposure in their home currency, moving their exposure to another currency, such as the US dollar, only in the case where they have a strong view on currency direction.
Ultimately, the choice depends on the investor’s risk appetite, cost considerations, and critically, on the investor’s market outlook.
Bonds Are Cheaper Than Stocks
Silano: Given the stock market valuations, does it make sense to reduce exposure to stocks and increase exposure to bonds?
Tipp: Following the sell-off in bonds in 2022, bonds lifted back up to historically attractive levels. While we do not have a view on equities, by some valuation metrics bonds screen as cheap relative to equities, suggesting competitive risk-adjusted returns in the years ahead. Furthermore, from a diversification perspective, at this point in the cycle where central banks are likely on hold, or possibly have an easing bias, bonds are likely to provide ballast to portfolios in a serious equity downdraft.
In short, while investors at present may or may not be adequately compensated for taking risk in equities, fixed income appears to be in the strategic buy zone. Spreads are narrow, but fundamentals are firm, and all in yields high, suggesting that quarter to quarter volatility notwithstanding, returns are likely to be attractive in the years to come. Additionally, the current geopolitical backdrop is likely to continue to create confusion, and opportunities for adding value through active management.
