Bonds had a strong begin to 2025, with most high-quality fastened earnings sectors up low- to mid-single digits by means of the primary half of the yr. Whereas shares skilled a roller-coaster experience powered by coverage uncertainty, fastened earnings usually held up nicely regardless of the broader market turbulence. Will or not 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 yr when shares offered off and bonds rallied. The chart beneath 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 Whole Returns
| 12 months-to-Date | 1 12 months | |
| Bloomberg U.S. Mixture 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 not really make investments instantly into an index. In contrast to investments, indices don’t incur administration charges, expenses, or bills. Previous efficiency doesn’t assure future outcomes.
Trying ahead to the second half of the yr, the more than likely end result for fastened earnings traders is sustained strong positive aspects. Nonetheless, there are dangers that needs to be acknowledged and monitored, together with the menace to the bond rally posed by rising considerations in regards to the nation’s deficit and long-term debt plans.
Shifting Focus to Lengthy-Time period Yields
When will the Fed begin reducing charges? Coming into the yr, that was one of many main questions for the bond market. We entered the yr with merchants pricing between one and two rate of interest cuts in 2025, with the primary minimize anticipated in Could resulting from an anticipated financial slowdown. However this fee minimize by no means materialized. The financial knowledge confirmed the job market remained impressively resilient by means of the beginning of the yr, 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 begin the yr and muted expectations for additional fee cuts in 2025, investor focus has shifted towards the longer finish of the yield curve. This shift grew to become particularly obvious after Moody’s downgrade of the U.S. economic system in Could amid the continuing congressional budgeting discussions which might be set to broaden the scale of the deficit and nationwide debt.
Lengthy-term Treasury yields fell all through the primary quarter of the yr. Within the second quarter, they rose notably, with the 30-year Treasury yield hitting a current excessive of practically 5.10 % in late Could. Whereas long-term yields have pulled again modestly from current highs, they nonetheless sit nicely above the degrees seen all through 2024, indicating continued investor concern. Upwards stress on long-term yields may current a headwind for fastened earnings traders within the second half of the yr, particularly as congressional negotiations over the price range and tax insurance policies proceed.
A Have a look at Company and Municipal Bonds
Whereas Treasury yields attracted many of the consideration within the first half of the yr, there are compelling alternatives within the company and municipal bond markets for traders keen to tackle credit score threat in alternate for heightened yields.
Treasury, municipal, and company bond yields are all presently above their respective 10-year median values (see chart beneath). 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 aside 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 Mixture Company Index; Euro HY: Bloomberg Pan-European Excessive Yield Index. Yield-to-worst is the bottom potential yield that may be acquired on a bond aside from the corporate defaulting and considers elements like name provisions, prepayments and different options which will have an effect on the bonds’ money flows. *All sectors proven are yield-to-worst aside from Municipals, which relies on the tax-equivalent yield-to-worst assuming a top-income tax bracket fee of 37% plus a Medicare tax fee of three.8%. Information to the Markets – U.S. Knowledge are as of Could 30, 2025.
Whereas investment-grade company bonds have moved in step with the broader market to this point this yr, investment-grade municipal bond returns lagged their friends within the first half. This underperformance was largely resulting from a mixture of excessive issuance and uneven funding flows, together with considerations about potential tax coverage adjustments 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 current underperformance.
Bonds Appearing Like Bonds
Finally, the primary half of the yr was largely optimistic for fastened earnings traders. Regardless of the ups and downs for shares, bonds held up comparatively nicely as compared. Given the coverage volatility to begin the yr, it’s encouraging to see bonds appearing like bonds in occasions of market uncertainty. We should always anticipate to see that habits 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 difficulty for traders. Whereas we’ve seen progress in reducing the temperature of the continuing price range 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 stress.
Whereas high-quality bonds have traditionally carried out nicely in occasions of uncertainty, current historical past has proven durations the place bonds and shares skilled declines on the identical time. Most lately, 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 impression markets, particularly if it prevents the Fed from reducing charges later within the yr.
Cautious Optimism Forward
All that being stated, fastened earnings traders needs to be cautiously optimistic as we enter the second half of the yr. Valuations are strong, yields are compelling, and bonds are appearing like bonds once more. These elements ought to contribute to a strong remainder of the yr for traders.
Bonds are topic to availability and market situations; some have name options which 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 threat is a consideration if offered or redeemed previous to maturity.
