Finding resilient income as tariffs and deficits reshape markets

2025 is shaping up to be the year when investors need to stay nimble and mindful of over- or under–anticipating the impacts of tariffs, fiscal spending and sticky inflation.

With this focus on staying on top of markets in mind, I sat down with Mike Schueller from Allspring Global Investments to explore how their global income strategy manages a six-month investment horizon to anticipate market inflection points. 

“We expect the US economy and the global economy to slow somewhat, but importantly, we think we will avoid a recession,” Schueller told me. “That’s a really good backdrop for fixed income assets.”

On that positive note, here’s how Allspring is positioning its global income portfolios for the months ahead. For the full story, watch the interview above.  

Please note, this interview was filmed 28th July, 2025.

Looking back and looking ahead

Schueller says the past six months have been a textbook case of why it pays to be proactive.

At the start of the year, Allspring dialled back risk as valuations looked stretched. That caution set the stage for a bold move when tariff announcements in April sent markets spinning.

“BB bond spreads widened significantly… so we sold BBB bonds and bought BB high yield corporates and US agency mortgage-backed securities,” he explained.

The strategy paid off as BBs outperformed. Still, he admits one misstep: “We didn’t add back longer-dated BBB bonds quickly enough. Those also performed fairly well.”

For the months ahead, the key test will be whether the economy can slow just enough to cool inflation, without sliding into recession. Schueller doesn’t see a full-blown recession happening but warns tariffs will act as a drag.

“We do view tariffs as somewhat akin to a value-added tax,” he said. “In 2025, we actually think fiscal spending will more than offset tariffs. In 2026, we think it’s about equal.”

This tug of war, in his view, still leaves fixed-income investors with a supportive environment.

Long bonds, why the long face?

The sheer size of government borrowing is putting the spotlight on long-dated bonds. Gory headlines and all, they are reshaping the bond market.

“We do see rising fiscal pressures that will lead to greater issuance. That’s why we think the long end of the curve will have to rise,” Schueller says.

Even so, he doesn’t expect yields to spiral out of control. Productivity gains from artificial intelligence and falling goods prices from China are likely to provide an anchor. “While we have some concerns about longer-dated government bonds, we do think that for the most part they’ll be range-bound,” he explains.

That’s why Allspring prefers bonds in the three-to-five-year range, the part of the curve most likely to benefit if central banks start cutting rates.

Mortgage-backed appeal

Against this backdrop, US agency mortgage-backed securities (MBS) stand out as one of Allspring’s favourite hunting grounds for yield.

“Our view of the world is that generally we think valuations are rich, and what we’re trying to do on behalf of our clients is find high quality income for their portfolio,” Schueller said.

With US home prices solid and rate volatility lower, MBS stand out. “It’s a very high-quality income stream,” he noted, an appealing trait in an uncertain macro environment.

Strong fundamentals are key to the appeal. “In the US, home prices are at really good levels and volatility within the rates market is lower. So we think that’s a positive for the US securitised market, particularly US agency mortgage-backed securities.”

Ready for the unknown

Even with a constructive outlook, Schueller warns that risks can’t be ignored. Tariffs have climbed to levels not seen since the 1930s, and credit valuations are hovering near record highs.

“We don’t have a lot of precedent for this. And when we compare that outlook to credit valuations that are near all-time tights, or the richest that they've been within the history of credit markets, we just don’t think our investors are getting paid for those risks.”

That’s why Allspring’s allocations to high-yield remain light, with greater weight in investment-grade and government securities. “We want to have the fund positioned so that we have ways to take advantage of any dislocations that we might see in risk markets,” Schueller explained.

The portfolio’s duration has recently been extended to 4.2 years, still below the benchmark’s 6.4 years. “We think 4.2 years does a good job of offering enough ballast should we see risk-off, while providing exposure to potential rate cuts,” he said.

Income without the drama

With interest rates peaking in 2023–24, some worry the best returns in bonds are behind us. Schueller doesn’t buy it.

“We actually expect rates to sort of be range-bound about where they are,” he said. 

While that may limit the capital gains from falling yields, it still supports steady income streams.

And if volatility strikes, Schueller has a plan: “The portfolio is positioned so that if we do have a risk-off market, we will be able to allocate to things like US high yield or emerging markets.”

For income-focused investors, that flexibility could prove vital. As Schueller put it, 2025 is about steady gains, not high-risk plays. It’s about staying disciplined, yet nimble, to find quality income and being ready to capitalise on opportunities as they arise.