Second Quarter 2025 Market Outlook Highlights                

In our Q2 outlook, we try to make sense of the bond market as we make our way through these dynamic times. While it's impossible to know when this period of high policy and market volatility will cross, nonetheless, we can still arrive at a few high conviction views at this point.

First, fears of impending U.S. policy changes, along with concerns about inflation and loose fiscal policy, have not only pushed credit spreads significantly wider, but have also pushed up government bond yields across the major markets. This combination of elevated government yields and wider spreads has boosted all in yields to attractive levels across much of the fixed income universe. As a result, near-term volatility notwithstanding, these once again high yield levels bode well for bond returns over the intermediate long term.

Second, rapid U.S. policy changes are increasing downside economic risks around the globe, as discussed in our economic outlook. Net-net, this suggests a lower growth trajectory ahead and probably a lower path for central bank interest rates as well. Lower growth may not work so well for stocks, and lower cash rates will whittle away the returns on money markets. For bonds, though, slower growth and easier monetary policy could push up bond prices and boost fixed income returns. In short, bad news for stocks and cash may be good news for bond investors. So despite these uncertain times, the outlook for the bond market looks quite favorable both on an absolute as well as relative basis. That is, bonds look attractive from a strategic point of view relative to other asset classes thanks to high all in yields and a potential downward bias for rates going forward.

Lastly, the confusion created by the rapid market shifts continues to create good opportunities for adding value through active management as discussed in our sector deep dives found in the outlook.