Bonds had a strong begin to 2025, with most high-quality fastened earnings sectors up low- to mid-single digits by the primary half of the 12 months. Whereas shares skilled a roller-coaster journey powered by coverage uncertainty, fastened earnings typically held up effectively regardless of the broader market turbulence. Will it’s the identical story within the second half? Let’s take a better look.
A Flock to Security
Traditionally, investment-grade bonds have benefited in occasions of uncertainty, as traders typically flock to the protection of high-quality fastened earnings when dangers rise. We actually noticed that play out earlier this 12 months when shares offered off and bonds rallied. The chart under highlights year-to-date and one-year returns for a handful of main sectors inside fastened earnings.
12 months-to-Date and 1-12 months Complete Returns
| Â | 12 months-to-Date | 1 12 months |
| Bloomberg U.S. Combination Bond Index | 2.35% | 4.61% |
| Bloomberg U.S. Company Bond Index | 2.40% | 5.13% |
| Bloomberg U.S. Company Excessive Yield Index | 3.10% | 9.26% |
| Bloomberg Municipal Bond Index | -1.02% | 0.91% |
| Bloomberg Municipal Excessive Yield Bond Index | 2.47% | 5.54% |
| Bloomberg U.S. Treasury 1-5 12 months Index | 3.44% | 6.45% |
Supply: Bloomberg, as of 6/10/2025. All indices are unmanaged, and traders can’t truly make investments instantly into an index. Not like investments, indices don’t incur administration charges, fees, or bills. Previous efficiency doesn’t assure future outcomes.
Trying ahead to the second half of the 12 months, the most probably end result for fastened earnings traders is sustained strong good points. Nonetheless, there are dangers that must be acknowledged and monitored, together with the risk to the bond rally posed by growing considerations concerning the nation’s deficit and long-term debt plans.
Shifting Focus to Lengthy-Time period Yields
When will the Fed begin slicing charges? Coming into the 12 months, that was one of many main questions for the bond market. We entered the 12 months with merchants pricing between one and two rate of interest cuts in 2025, with the primary lower anticipated in Might as a result of an anticipated financial slowdown. However this price lower by no means materialized. The financial knowledge confirmed the job market remained impressively resilient by the beginning of the 12 months, whereas inflation remained stubbornly excessive. Fed members, together with Chair Jerome Powell, have indicated the central financial institution is in no rush to regulate rates of interest and can stay data-dependent when setting charges at future conferences.
Given the shortage of Fed exercise to start out the 12 months and muted expectations for additional price cuts in 2025, investor focus has shifted towards the longer finish of the yield curve. This shift turned particularly obvious after Moody’s downgrade of the U.S. economic system in Might amid the continuing congressional budgeting discussions which can be set to broaden the scale of the deficit and nationwide debt.
Lengthy-term Treasury yields fell all through the primary quarter of the 12 months. Within the second quarter, they rose notably, with the 30-year Treasury yield hitting a latest excessive of almost 5.10 % in late Might. Whereas long-term yields have pulled again modestly from latest highs, they nonetheless sit effectively above the degrees seen all through 2024, indicating continued investor concern. Upwards strain on long-term yields may current a headwind for fastened earnings traders within the second half of the 12 months, particularly as congressional negotiations over the funds and tax insurance policies proceed.
A Take a look at Company and Municipal Bonds
Whereas Treasury yields attracted many of the consideration within the first half of the 12 months, there are compelling alternatives within the company and municipal bond markets for traders prepared to tackle credit score danger in trade for heightened yields.
Treasury, municipal, and company bond yields are all at the moment above their respective 10-year median values (see chart under). However tax-adjusted municipal bonds and investment-grade company bonds might present extra potential yield in comparison with Treasuries.
Supply: Bloomberg, FactSet, J.P. Morgan Credit score Analysis, J.P. Morgan Asset Administration. Indices used are Bloomberg apart from ABS, rising market debt and leveraged loans: ABS: J.P. Morgan ABS Index; CMBS: Bloomberg Funding Grade CMBS Index; EMD (USD): J.P. Morgan EMIGLOBAL Diversified Index; EMD (LCL): J.P. Morgan GBI-EM World Diversified Index; EM Corp.: J.P. Morgan CEMBI Broad Diversified; Leveraged Loans: JPM Leveraged Mortgage Index; Euro IG: Bloomberg Euro Combination Company Index; Euro HY: Bloomberg Pan-European Excessive Yield Index. Yield-to-worst is the bottom attainable yield that may be obtained on a bond other than the corporate defaulting and considers components like name provisions, prepayments and different options that will have an effect on the bonds’ money flows. *All sectors proven are yield-to-worst apart from Municipals, which relies on the tax-equivalent yield-to-worst assuming a top-income tax bracket price of 37% plus a Medicare tax price of three.8%. Information to the Markets – U.S. Knowledge are as of Might 30, 2025.
Whereas investment-grade company bonds have moved according to the broader market to date this 12 months, investment-grade municipal bond returns lagged their friends within the first half. This underperformance was largely as a result of a mixture of excessive issuance and uneven funding flows, together with considerations about potential tax coverage modifications that would strip some municipal issuers of their tax-exempt standing. Trying ahead, these headwinds are anticipated to show into tailwinds for traders, as municipal bond valuations seem comparatively enticing as a result of latest underperformance.
Bonds Appearing Like Bonds
In the end, the primary half of the 12 months was largely optimistic for fastened earnings traders. Regardless of the ups and downs for shares, bonds held up comparatively effectively compared. Given the coverage volatility to start out the 12 months, it’s encouraging to see bonds appearing like bonds in occasions of market uncertainty. We should always anticipate to see that conduct proceed within the second half.
That’s to not say there aren’t any dangers to this outlook. Political uncertainty stays probably the most urgent challenge for traders. Whereas we’ve seen progress in decreasing the temperature of the continuing funds and commerce negotiations, additional surprises or disruptions may rattle markets. Mounted earnings traders may additionally face financial headwinds, particularly if there’s a sustained rise in inflationary strain.
Whereas high-quality bonds have traditionally carried out effectively in occasions of uncertainty, latest historical past has proven intervals the place bonds and shares skilled declines on the similar time. Most not too long ago, in 2022, a surge in inflation and rates of interest led to double-digit losses for each shares and bonds. Whereas it’s not anticipated presently, if we do see a significant rise in inflation, it may negatively affect markets, particularly if it prevents the Fed from decreasing charges later within the 12 months.
Cautious Optimism Forward
All that being stated, fastened earnings traders must be cautiously optimistic as we enter the second half of the 12 months. Valuations are strong, yields are compelling, and bonds are appearing like bonds once more. These components ought to contribute to a strong remainder of the 12 months for traders.
Bonds are topic to availability and market situations; some have name options that will have an effect on earnings. Bond costs and yields are inversely associated: when the value goes up, the yield goes down, and vice versa. Market danger is a consideration if offered or redeemed previous to maturity.
