Bonds had a stable begin to 2025, with most high-quality mounted earnings sectors up low- to mid-single digits by means of the primary half of the 12 months. Whereas shares skilled a roller-coaster journey powered by coverage uncertainty, mounted 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 more in-depth look.
A Flock to Security
Traditionally, investment-grade bonds have benefited in instances of uncertainty, as buyers usually flock to the protection of high-quality mounted earnings when dangers rise. We actually noticed that play out earlier this 12 months when shares bought off and bonds rallied. The chart beneath highlights year-to-date and one-year returns for a handful of main sectors inside mounted earnings.
Yr-to-Date and 1-Yr Complete Returns
| Â | Yr-to-Date | 1 Yr |
| 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 Yr Index | 3.44% | 6.45% |
Supply: Bloomberg, as of 6/10/2025. All indices are unmanaged, and buyers can’t really make investments immediately into an index. Not like investments, indices don’t incur administration charges, expenses, or bills. Previous efficiency doesn’t assure future outcomes.
Wanting ahead to the second half of the 12 months, the more than likely end result for mounted earnings buyers is sustained stable beneficial properties. Nonetheless, there are dangers that must be acknowledged and monitored, together with the risk to the bond rally posed by growing 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 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 Could on account of an anticipated financial slowdown. However this price lower by no means materialized. The financial knowledge confirmed the job market remained impressively resilient by means of 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 begin 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 grew to become particularly obvious after Moody’s downgrade of the U.S. economic system in Could amid the continued congressional budgeting discussions which might be set to increase the dimensions 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 practically 5.10 p.c in late Could. 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 stress on long-term yields might current a headwind for mounted earnings buyers within the second half of the 12 months, particularly as congressional negotiations over the funds and tax insurance policies proceed.
A Have a look at Company and Municipal Bonds
Whereas Treasury yields attracted a lot of the consideration within the first half of the 12 months, there are compelling alternatives within the company and municipal bond markets for buyers keen to tackle credit score threat in change for heightened yields.
Treasury, municipal, and company bond yields are all at the moment 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 doable 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 aside 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 Could 30, 2025.
Whereas investment-grade company bonds have moved consistent with the broader market up to now this 12 months, investment-grade municipal bond returns lagged their friends within the first half. This underperformance was largely on account of a mix of excessive issuance and uneven funding flows, together with considerations about potential tax coverage modifications that might strip some municipal issuers of their tax-exempt standing. Wanting ahead, these headwinds are anticipated to show into tailwinds for buyers, as municipal bond valuations seem comparatively engaging as a result of latest underperformance.
Bonds Appearing Like Bonds
Finally, the primary half of the 12 months was largely constructive for mounted earnings buyers. Regardless of the ups and downs for shares, bonds held up comparatively effectively compared. Given the coverage volatility to begin the 12 months, it’s encouraging to see bonds appearing like bonds in instances of market uncertainty. We should always count on 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 subject for buyers. Whereas we’ve seen progress in reducing the temperature of the continued funds and commerce negotiations, additional surprises or disruptions might rattle markets. Mounted earnings buyers can also face financial headwinds, particularly if there’s a sustained rise in inflationary stress.
Whereas high-quality bonds have traditionally carried out effectively in instances of uncertainty, latest historical past has proven durations the place bonds and shares skilled declines on the identical 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 at the moment, if we do see a significant rise in inflation, it might negatively influence markets, particularly if it prevents the Fed from reducing charges later within the 12 months.
Cautious Optimism Forward
All that being mentioned, mounted earnings buyers must be cautiously optimistic as we enter the second half of the 12 months. Valuations are stable, yields are compelling, and bonds are appearing like bonds once more. These components ought to contribute to a stable remainder of the 12 months for buyers.
Bonds are topic to availability and market circumstances; 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 threat is a consideration if bought or redeemed previous to maturity.
