Bonds had a stable begin to 2025, with most high-quality mounted revenue sectors up low- to mid-single digits by way of the primary half of the 12 months. Whereas shares skilled a roller-coaster journey powered by coverage uncertainty, mounted revenue 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 buyers usually flock to the security of high-quality mounted revenue when dangers rise. We definitely 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 mounted revenue.
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 buyers can not truly make investments straight into an index. In contrast to 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 final result for mounted revenue buyers is sustained stable beneficial properties. Nonetheless, there are dangers that ought to be acknowledged and monitored, together with the risk to the bond rally posed by rising considerations concerning 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 minimize anticipated in Could attributable to an anticipated financial slowdown. However this price minimize by no means materialized. The financial information confirmed the job market remained impressively resilient by way 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 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. financial system in Could amid the continued congressional budgeting discussions which are set to develop 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 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 revenue buyers within the second half of the 12 months, particularly as congressional negotiations over the price range 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 buyers keen to tackle credit score danger in change for heightened yields.
Treasury, municipal, and company bond yields are all at present above their respective 10-year median values (see chart under). However tax-adjusted municipal bonds and investment-grade company bonds could 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 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 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 apart from Municipals, which is predicated 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. Information are as of Could 30, 2025.
Whereas investment-grade company bonds have moved in keeping with the broader market to this point this 12 months, investment-grade municipal bond returns lagged their friends within the first half. This underperformance was largely attributable to 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. Trying 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 Performing Like Bonds
In the end, the primary half of the 12 months was largely optimistic for mounted revenue buyers. 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 performing like bonds in occasions 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 essentially the most urgent challenge for buyers. Whereas we’ve seen progress in decreasing the temperature of the continued price range and commerce negotiations, additional surprises or disruptions might rattle markets. Fastened revenue buyers may face financial headwinds, particularly if there’s a sustained rise in inflationary stress.
Whereas high-quality bonds have traditionally carried out effectively in occasions 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 presently, if we do see a significant rise in inflation, it might negatively affect markets, particularly if it prevents the Fed from decreasing charges later within the 12 months.
Cautious Optimism Forward
All that being stated, mounted revenue buyers ought to be cautiously optimistic as we enter the second half of the 12 months. Valuations are stable, yields are compelling, and bonds are performing like bonds once more. These elements ought to contribute to a stable remainder of the 12 months for buyers.
Bonds are topic to availability and market situations; some have name options which will have an effect on revenue. 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.