GW&K Taxable Monthly Update January 2025

• The US economy continued to display strong momentum heading into the new year, underpinned by robust consumer spending and a solid labor market.
• Key consumer price data signaled steady inflationary pressures, helping to keep interest rates in check across the yield curve.
• The Fed kept rates steady at the January Federal Open Market Committee (FOMC) meeting, maintaining a target range of 4.25% – 4.50%. Fed Chair Jerome Powell expressed patience on further rate cuts, as the FOMC reassesses a strong labor market and somewhat elevated inflation.

TAXABLE BOND MARKET UPDATE & OUTLOOK

• The Bloomberg US Aggregate Bond Index posted a positive return, aided by benign inflation prints and the Fed hitting the pause button.
• Fiscal policy shifts from the new administration around trade and immigration have been a major focus of the market.
• The yield curve halted the aggressive steepening momentum seen in Q4, as10-year and 2-year Treasury yields moved essentially in tandem.
• The Fed and the futures market are pointing to a target federal funds rate of 3.9% at the end of 2025 — approximately 100 bps higher than expectations just a few months ago. The longer-term outlook for the “neutral” rate remains a widely debated target.
• Strong underlying fundamentals and positive technicals drove high yield spreads to retest last year’s tight levels. A strong macroeconomic backdrop and a relentless hunt for yield drove lower- quality outperformance. Investment grade spreads were essentially unchanged, as a strong primary calendar kept spreads from compressing further from their already tightest level in decades.
• Agency mortgage-backed securities marginally outperformed similar duration Treasuries. The sector continued to benefit from lower interest-rate volatility, attractive valuations, and diminished seasonal supply. Investors remain on alert for long-held government-sponsored enterprises like Fannie Mae and Freddie Mac becoming private.
• Asset-backed securities (ABS) slightly underperformed on elevated new-issue supply levels. ABS remains a high-quality sector that will carry well in a higher-for-longer interest-rate environment.
• With the Fed expressing no immediate urgency to cut rates, and inflation still running above the Fed’s 2% target, Treasury yields are likely to remain elevated. Despite tight valuations, the corporate bond sector should continue to be supported by attractive yields and strong fundamentals. The securitized sector provides a very attractive risk-adjusted yield, in a lower-rate volatility environment.