Outlook on inflation, interest rates and yields in 2025

Jupiter Strategic Bond manager Harry Richards sits down with ii’s Sam Benstead to discuss his outlook for global bond markets.

He gives predictions for inflation, interest rates and yields in 2025 in the UK, and reveals how he is investing to profit from these market views.

This includes a preference for government bonds, including from the UK, US and Australia.

Jupiter Strategic Bond is a member of ii’s Super 60 list of recommended fund ideas.

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Sam Benstead, fixed income lead, interactive investor: Hello and welcome to the latest Insider Interview. Our guest today is Harry Richards, manager of Jupiter Strategic Bond Fund. Harry, thanks very much for coming into the studio.

Harry Richards, Jupiter Strategic Bond manager: It's a pleasure. Thank you for having me.

Sam Benstead: Inflation is one of the big factors which affects bond prices. It's just over 2% in the UK today. So, where do you think inflation is going in the UK, but also globally? And how does that affect how you manage the portfolio?

Harry Richards: Our general view of inflation is that we've come a long way. The year-over-year level of inflation has dropped substantially. So, if we look across the G20 economies, about 60% to 65% of them today have inflation below 3%. Whereas if we went back a couple of years to 2022, that number was substantially lower as we had all the impacts from Covid, so we've made a lot of progress.

One element that we haven't made progress on with regard to inflation is the level of inflation. So, while the year-over-year numbers have come down, we still have a cost-of-living crisis because things are a lot more expensive than they were. There's a number of things, as we look globally, that influence how we think that will unfold. Probably most importantly, on a global basis, it's the unemployment rate. But a lot of people also focus on the United States, and the US has very sticky shelter inflation. If that gets resolved, the underlying level of inflation in the US is even lower than many people realise. It's in the low ones.

We have come a long way, but also within government bond markets, growth is also a factor and some excitement about Donald Trump and his potential policies have caused a little bit more premium to be embedded in those government bond yields because people think there might be a little bit more growth associated with it.

So, where are we going? Globally, our view is that inflation should trend lower. We should see that year-over-year number continue to move towards target. We think central banks have the power to do that by keeping interest rates where they are. And some of those lagged impacts of interest rates remaining high over the last few years is still yet to feed through. So, that lagged impact of interest rate hikes is still being felt, and will continue to be felt even if rate cuts continue.

As we look specifically at the UK, we did briefly drop below 2% and some of these base effects or those year-over-year effects caused us to jump a little bit above 2%. If you look at economic forecasts at the moment, I think most economists believe that inflation will return to a normalised 2% on a persistent basis from late 2026 onwards. That seems to be the broad consensus.

We actually think there's a possibility that if global labour markets start to crack a little bit more, that inflation could undershoot. And again, that adds to our view that government bonds remain really compelling here, as we think that that's an event risk that is not priced in, and we think that that's a differentiating exposure that we have within the strategies today that we can benefit from.

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Sam Benstead: So, you think inflation may be lower than other investors expect, that let's central banks cut interest rates a bit faster, maybe a bit harder. How do you invest in that environment then?

Harry Richards: In terms of positioning for lower levels of inflation, potentially lower levels of growth if unemployment rates rise, owning government bonds is a real sweet spot. And if you can supplement that with short-dated credits, so lending to companies over short time horizons with maturities in one or two years' time, just to get a little bit of extra income, then that can provide a great solution, where if your timing's not perfect, you can have a little bit more carry, a little bit more income generation in the meantime. And then when those rate cuts come through, you can see more capital appreciation and get more bang for your buck.

To put this in context and, again, this is just an example, we've looked through as many cycles as we can do for the US Treasury market, and if you take the average return over three years following the first interest rate cut by just owning the general US Treasury market, on average you've earned 30% over three years or 10% annualised.

And that means that, typically, you're seeing that path through those rate cuts, capturing that income and some of that capital appreciation as well. And we think that this time will be relatively similar to that. We think you'll get paid extra and get more capital appreciation as central banks start to cut interest rates, especially if we're right on the unemployment markets being a little bit more wobbly, or seeing greater risk of job rises as we look out into the future, and some of our leading indicators, unfortunately, are saying that.

And some of the soft factors that we see from the likes of Rachel Reeves in the most recent Budget in the UK, where there are increased national insurance pressures that have been put on businesses, that can materially impact wages, can materially impact job creation, or the availability of jobs, and can lead to higher unemployment.

And in a similar way, some of the measures that we're seeing from Donald Trump in the United States. The US government is pretty large. We've seen a big increase of government jobs over the last five, 10, 15 years. And with Elon Musk at the head of the Department of Government Efficiency, he's set to take a significant axe to some of the spending that maybe isn't required. He's notionally put out a $2 trillion figure. $2 trillion happens to be roughly the size of the deficit in the United States. I think that's probably quite extreme, but even a portion of that could go a long way to increasing efficiency and bringing some more softness to the labour market.

So on our numbers, I think the US government employs about 22 million people, and we're certainly going to see some job losses as efficiencies are seen. And so this could all add to that change in the labour-market dynamic and, ultimately, longer-term, less inflationary pressure, lower growth and more ability for central banks to cut interest rates.

Sam Benstead: So, you're saying that political changes in the UK and US could be good news for inflation. Isn't there the argument that actually tariffs, or extra taxes on companies, might lead to high prices for businesses and therefore be inflationary?

Harry Richards: Absolutely. There’s certainly that argument and that's one of the things that's injected a lot of volatility into government bonds. In the run-up to the US election, that precisely caused yields to rise. That fear of tariffs, that fear of nationalism, protectionism caused in some part yields to rise. And the fear that deficit spending could get a bit more out of control. We've looked into this quite significantly and we think quite a lot of those risks are more priced in now. And there's a few reasons for that.

One of the reasons why Donald Trump was elected was because the US population effectively voted down inflation as one of the reasons why the Biden administration ended up coming under huge amounts of pressure. So, the economic concerns and inflation worries would be quite silly things for Donald Trump and his administration to push in the opposite direction too far.

Now, that doesn't mean we haven't heard the counterfactual. So, the possibility of increased tariffs or tax cuts. You have to do quite a lot of work to even maintain the tax cuts from 2017. So, further tax cuts would have to have pay force, in our view, and that means raising taxes elsewhere. And some of that could come from tariffs.

But we've heard from the likes of Scott Bessent, who is one of the lead individuals who potentially might take the Treasury role under the Donald Trump administration, that Trump doesn't want to be an inflationary president. It's a very, very quick way to once again see his popularity evolve to the downside. And so some of those efficiency cuts I was talking about from the likes of Elon Musk may lead to lower levels of inflation. But I think that they will be quite concerned around being too aggressive, and there are certain precedents for this.

So, if you look at 1930, you had the Smoot-Hawley tariffs that were introduced, and this was to do with the agricultural sector in the US back then. And we like to look at history to give us a guide to the future. Why that's interesting is that it resulted in retaliatory tariffs and it resulted in a big fall in GDP, lots of stresses for various different types of businesses and ultimately it was a net negative.

Many believe that it actually made the Great Depression much worse. And so the risk of tit-for-tat tariffs from the Europeans, from the Chinese, could be extremely damaging for global growth. And some of it may be offset by currency moves. Recently we've seen the US dollar strengthen, we've seen the euro weaken, as well as many emerging market currencies too, potentially in some anticipation of these tariff elements. So, Donald Trump has more bark than bite, but he's a great negotiator. And I think that this gets people to the table and that might be exactly what his plan is.

Sam Benstead: And this leads you then to government bonds. What kind of yields are you finding around the world, and what's your view on gilts?

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Harry Richards: Specifically in the parts of the world where we're most focused on, it's the higher-yielding developed markets. I mentioned the UK, the US, Australia and New Zealand. Those are our primary exposures in that space. They've all got yields between around 4% and 4.5% at the 10-year point.

I think one of the interesting things that we've seen in the last few weeks is that 4.5% level, for the US 10-year especially, has kind of been rejected. It's seen as quite a significant resistance. It seems to be a bit of a pinch point where risk assets become a little bit more volatile. The Nasdaq doesn't like it, it sees some retracement on that level being approached. So, it could be a bit of a line in the sand, a technical level that people start to buy or have been buying at.

When it comes to the UK, that's an exposure where we've had very limited exposure to the government bond space in the UK over the last 10 to 15 years. We've typically found better opportunities elsewhere. We think a lot is baked into the price now. So, we've actually been increasing our exposure to the UK specifically via medium- to long-dated gilts. That's pretty much, as I said, for the first time in the last 10, 15 years to have a meaningful exposure to the United Kingdom. And that's primarily driven by yields being elevated relative to many other developed markets, but also the fundamentals.

Growth here in the UK is pretty lacklustre, unfortunately. And inflation is, broadly speaking, relatively close to target. And when we put those things together, that allows the central bank to potentially cut interest rates quite meaningfully. And if you were to push me on that, I would say that I think the Bank of England is pretty behind the curve. They should be cutting rates quite significantly at this stage, in my view. But many other markets, many other elements are factoring into their decisions.

Sam Benstead: Let's stay on the UK. If we could look forward 12 months time, say we're sat here at Christmas 2025, where would you put the 10-year gilt yields? Where would you put the inflation rates, and where would you put the Bank of England interest rates?

Harry Richards: As Yogi Berra said, predictions are always difficult, especially when they're about the future. You know, a time and a level is always a challenge. I think if we take it back to basics, one of the old rules of thumb that's used in the bond markets is the compensation you get on the 10-year should be roughly the growth rate on an inflation-adjusted basis plus your inflation component. So, your real growth, real yield, plus your inflation.

If we look at the growth on a structural basis in the UK, it's a bit less than where it is in the US. I would say structurally, we're probably somewhere between half a per cent structural growth and 1.5%. And in terms of inflation, as I look forward, the economists' view is that inflation will return towards that 2% target over the next couple of years.

Our view is that the risk is to the downside, i.e. inflation might start to fall faster than that. And the numbers that the Bank of England, and we as the market, are looking at will be lower than that 2% level. And that could put your 10-year fair value at around around 3% to 3.5% in our view.

So, nearly 100 basis points, maybe a little bit more, maybe a little bit less, away from where we are today. And that's one of the reasons why we see it as compelling value. The fundamentals suggest low growth, inflation, we think, is relatively benign here, and that creates a good opportunity.

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Sam Benstead: Do you have a figure of where inflation might be and where base rate might be as well?

Harry Richards: So, in terms of where inflation might be, I think just below 2% is probably fair with a risk skewed to the downside if we do have the unemployment rate start to rise a little bit more.

Obviously, as many of you will know, there has been some debate over the validity of unemployment data in the UK, but especially with some of these measures, as mentioned from Rachel Reeves, I think that the risk is that we may see more layoffs, we may see a little bit more pressure on things like supermarkets that have been very vocal on many of those lower-wage roles, where it becomes much more expensive for them.

In terms of what's priced in, at the moment the market has about three cuts priced in for the next 12 to 14 months in the United Kingdom. That would leave interest rates, roughly speaking, at around 4% next year. If we're right on the former, on the labour markets and inflation, I think that 3.5% or lower would be where we might end up. But again, there's a lot of variables there and there may be some intervening factors that cause a change to that view as we move through the year.

Sam Benstead: Bonds are typically seen as a defensive investment. This wasn't actually the case, though, in 2022 when interest rates rose. But now we've hit the top of the interest rate cycle, rates are now beginning to fall. Are bonds back as a defensive investment, should they do well if the stock market wobbles?

Harry Richards: Our view is firmly, yes, we do think bonds are back, and that term has been used a few times over the last few years. But we do think from these levels of yield that they have that ability to cushion multi-asset portfolios against equity volatility.

We do think the ability for them to correlate negatively to those other assets, or when equities fall, bond prices will rise. That kind of 2008 to 2022 kind of experience will be back, will return, and will be something that can play a key part in stabilising people's portfolios.

But you're spot on. In 2022, that wasn't the case. The spike of inflation that we saw, the cost-push issues that face the world and the Russia-Ukraine crisis caused bond yields to rise. And actually that started to impact the equity market, and we saw positive correlation between those two assets. And that way, those monthly asset portfolios, the 60/40 started to struggle. As we look forward, my firm belief is that from these levels, the 60/40 can be a very viable option for people once again.

Sam Benstead: And finally, the question we ask all our guests, do you personally invest in your fund?

Harry Richards: Yes, absolutely. I firmly believe that all fund managers should eat their own cooking, and I've long held that view. So, yes, I do invest in the fund.

Sam Benstead: Harry, thanks very much for coming into the studio.

Harry Richards: Thanks very much for having me.

Sam Benstead: And that's all we've got time for today. You can check out more Insider Interviews on our YouTube channel where you can, like, comment and subscribe. See you next time.