Winds of change 2025: spotting opportunities after peak yields

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

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

Franklin Templeton is most concerned about markets with dual vulnerabilities: high revenue exposure to and dependence on the US as an export market. Capital inflows to emerging markets would generally be welcomed, as sovereign debt issuance appears 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 Templeton believes in a cautious approach to extending Treasury duration. The term premium has already expanded quite materially, particularly since the start of the US Federal Reserve’s rate-cutting cycle in September 2024.

However, although 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.

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