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Bond returns have been strong year to date due to economic resilience and lower-than-feared inflation.1
Credit spreads remain tight, limiting further tightening, while many individual investors are still on the sidelines.
The Federal Reserve is expected to cut rates, possibly in September, if economic data shows signs of slowing.
June was another positive month for bonds. The Bloomberg US Aggregate Bond Index was up about 1.5% and the Bloomberg US Corporate Bond Index up around 1.8%; both indexes are up just over 4% year to date.1 We discuss these returns, Federal Reserve (Fed) moves, and the economy in our monthly question and answer.
Craig: What do you think has been the catalyst for bond returns?
Matt: It’s been a better year than many people probably expected given the noise around tariffs and inflation. For me, it’s that the economy has been resilient. Inflation hasn’t been as bad as people had feared, and while the tariffs have been in the headlines, they haven’t been as punitive as people thought from an inflationary perspective. That may change, however, as we see more data. Overall, we think that means that the Fed is likely to cut rates at some point this year. That has led some market participants to front run potential cuts with an increased risk appetite.
Craig: The market believes we’ll see cuts in September and December. Do you agree with that, particularly if inflation remains stickier? Or do you think the market is being a bit aggressive on its expectations for cuts?
Matt: Looking at the economic data, particularly around employment, it’s slowing. Although, we recently had some decent job openings and payroll numbers. So that’s good. But overall, we’re seeing the economy slow. The Fed is currently in a restrictive stance, which means you’re going to make the economy slow even more, which I don’t think they want. So even though it’s been resilient, I’m concerned that if the Fed doesn’t cut sooner, they may be behind the curve. I think they should cut in July, however, I don’t think they will. I think Fed Chairman Jerome Powell will tee a cut up instead and then explain his forward-looking views on rates at the Jackson Hole Economic Symposium in August. We think the Fed will likely cut in September and then if they’re behind the curve you could potentially see two more cuts by the end of the year. The sooner they move, ironically, the less they may have to cut overall.
Craig: Let’s talk about credit spreads. The S&P 500 ended June at new highs, and July has historically been a strong month too. Why are credit spreads struggling to keep up in this market?
Matt: It’s been a bit frustrating to see credit spreads go sideways to slightly tighter in June while stocks just went up and up. Our view is that the economy would hang in well enough and that eventually many of the negative headlines would go away. That would allow markets to go higher, which usually means credit spreads can go tighter. For now, it hasn’t turned out that way. I think there are two reasons why. First, spreads are already tight making it harder for them to move tighter. Second, yields overall have come down. We’ve had 5%-5.50% yields on the investment grade index all year.2 As we got higher on that range, there have been more buyers, and as we got lower on that range, we’ve seen a bit more cost consciousness from investors. They’ve been a little bit more particular to the lower end of yield range.
So, right now institutional investors have pulled back just a touch, but I think we’re still missing the individual investors, who have been waiting to enter the bond market. I think that with a more than 4% total return year to date,3 we may see them start moving off the sidelines. It may be because of a bit of FOMO (fear of missing out), where they want to start participating before yields are materially lower
Craig: The market almost seems like it’s on summer break right now. Stocks are at all-time highs and credit spreads at all-time tights. Do you think there has been a little complacency in this type of environment?
Matt: There’s probably some complacency, but overall, I think there’s a lot of good that doesn’t always get reported. I continue to think that the economy has been on great footing. Fundamentals have been good from a balance sheet standpoint, so there’s really no reason to panic. I think spreads may go tighter from here.
Source: Bloomberg L.P. The year-to-date returns as of June 30, 2025 were 4.02% for the Bloomberg US Aggregate Bond Index and 4.17% for the Bloomberg US Corporate Bond Index.
Source: Bloomberg L.P., Bloomberg US Credit Index as of June 30, 2025.
Source: Bloomberg L.P., Bloomberg US Aggregate Index return as of June 30, 2025.
Will it be another strong summer for munis as it has historically been? Get insight from Mark Paris, Chief Investment Officer and Head of Municipal Strategies.
Despite uncertainty around Federal Reserve rate cuts, credits spreads, and tariffs, bonds have had solid performance and yields have been attractive.
Longer-term Treasury yields are higher than they were before the “Liberation Day” tariffs. Why are rates behaving this way, and what does this mean for investment grade bond investors?
Important information
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Image: Alexander Spatari / Getty
All investing involves risk, including the risk of loss.
Past performance does not guarantee future results.
Investments cannot be made directly in an index.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The Bloomberg US Aggregate Bond Index is an unmanaged index considered representative of the US investment grade, fixed-rate bond market.
The Bloomberg US Corporate Bond Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes US dollar-denominated securities publicly issued by US and non-US industrial, utility, and financial issuers.
Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
Credit spread is the difference in yield between bonds of similar maturity but with different credit quality.
High yield bonds, or junk bonds, involve a greater risk of default or price changes due to changes in the issuer’s credit quality. The values of junk bonds fluctuate more than those of high quality bonds and can decline significantly over short time periods.
Inflation is the rate at which the general price level for goods and services is increasing.
The yield curve plots interest rates, at a set point in time, of bonds having equal credit quality but differing maturity dates to project future interest rate changes and economic activity.
The opinions referenced above are those of the author as of July 17, 2025. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations.
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