Markets

are supposed to quake when policy shocks loom. Tariff and geopolitical jolts should, in theory, push prices higher for derivatives that insure against debt default and widen the spread of

interest rates

of credit over benchmarks. Yet, in 2025, the louder the headlines, the quieter the market gauges of risk have become.

While there could be a small pothole of volatility ahead, expectations of volatility implied by pricing on options contracts have fallen for two years. The yield premiums offered to woo investors on new bond issues match pre‑pandemic lows. And key indices of the cost of credit default swaps — which act as a kind of insurance on debt — sit near long-term lows.

Why does anxiety co-exist with such market pricing? Because the United States has quietly become one of the world’s most shock‑resistant economies. That resilience not only supports equities, it also lets investors lock in once‑in‑a‑generation income on

high‑grade bonds

that serve as a ballast alongside riskier positions.

Services now generate 81 per cent of U.S. gross domestic product and 69 per cent of consumer spending, up from 38 per cent in the 1940s. Real services consumption has contracted only twice year on year — in 2009 and 2020; the higher the services share, the smoother the cycle. Digitized supply chains and flexible

labour markets

blunt default risk and reduce earnings shocks.

Households are stronger too. Debt to net worth is near all-time lows, 50 per cent below 2008 highs. And net worth stands at 7.6 times disposable income — higher than anytime pre-pandemic. Total household interest costs are under 10 per cent of income — lower than any pre-pandemic reading on record. The average mortgage rate outstanding is just 4.05 per cent, keeping interest payments at four per cent of income. Meanwhile, Americans have more equity in their homes than ever before.

Corporate balance sheets mirror that discipline. Investment‑grade issuers spent the past decade lengthening the duration of their debt and building cash. Household and business leverage is more than 30 per cent below the Great Financial Crisis highs, and profit margins sit at 13.8 per cent, higher than any pre-pandemic reading on record. With no balance‑sheet faultline, forced deleveraging — the kind that ignites volatility — never starts.

Households hold financial assets worth US$129 trillion, with about half sitting in assets yielding north of four per cent, meaning reinvestment needs become self-fulfilling. That cash hunts yields every day, creating a persistent bid for corporates and securitized assets. Dealers keep lighter inventories, trading spreads compress, and price swings shrink.

While there was a tariff scare earlier this year, the shock fizzled. While risk premia are tight, yields are not. Treasury yields are still above four per cent, and

inflation

has cooled to just above two per cent. Positive real yields after taking into account inflation are the richest for at least 15 years.

A diversified portfolio of A‑rated debt now earns six to seven per cent income with roughly three per cent volatility in price movements. Securitized assets and private credit add equity‑like returns with loss expectations akin to investment grade debt. With selective use of options, fixed‑income returns can plausibly reach high single‑digits, without chasing junk-rated debt for higher yields. Crucially, such returns are an attractive ballast for portfolios today, not icing.

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Simultaneously, breakthroughs in AI, cloud, robotics, and other productivity-enhancing forms of technology are creating unique upside in equities. Valuations may look full, but cash flow generation continues to eclipse expectations. Meanwhile, record cash levels as seen in money market funds, aggressive corporate buybacks, and a thin calendar of initial public offerings keep demand ahead of supply. Pullbacks in markets are invitations to reload positions in game-changing technology leaders and cash‑generating incumbents alike.

Markets are not ignoring risk; they are pricing a system built to absorb it. A service‑oriented economy, fortress balance sheets, and a liquidity‑rich investor base deliver a two‑for‑one: resilient growth and elevated fixed income yields.

Investors should lean into this — maintain equity exposure to ride durable earnings growth; tilt bond holdings towards the higher quality end of the market; augment portfolios with uncorrelated assets such as real estate, private investments, and even a measured allocation to crypto. Done thoughtfully, the portfolio can compound at high‑single-digit rates, even if geopolitical drama dominates the headlines. In 2025, the loudest noises come from headlines, not the trading floor.

The writer is chief investment officer of global fixed income at BlackRock

© 2025 The Financial Times Ltd