Taxable Monthly Update May 2025

• Yields rose markedly amid intensifying fiscal concerns, a downgrade to the US sovereign debt rating, and rising yields overseas.
• Risk assets rallied on better-than-expected economic data and a perceived de-escalation in trade tensions with our major trading partners.
• The US Aggregate Bond Index returned -0.72%, breaking a four-month streak of gains. Rates sold off while spreads tightened. The fixed income market is up 2.45% year-to-date as of May 31, 2025.

TAXABLE BOND MARKET UPDATE & OUTLOOK

Sources: FactSet and Bloomberg

• Uncertainty stemming from the administration’s tariff policy decisions lessened, as evidenced by the latest Conference Board and University of Michigan surveys showing better results. Consumers continue to be resilient, indicated by recent spending data and retailer earnings reports. A job market that remains in solid shape has been an important bulwark. All led to an overall easing of economic growth concerns.
• Investors, nevertheless, have a lot to digest and the One Big Beautiful Bill Act that Republicans and the White House are attempting to pass is expected to persist in blazing a path of large deficits that the government will need to fund by selling more debt.
• Investment grade corporates outperformed on the back of the largest decline in spreads since November 2023. The move almost offset the effect rising yields had on the longer-duration sector. The economic tone has improved and spreads have reacted accordingly. Lower-rated credits outperformed throughout the credit stack.
• High yield performed better than the broad bond market, with October of 2022 being the last month spreads declined this significantly. The sector also benefited from its lower sensitivity to interest-rate changes. May’s return was the best return since July of last year.
• While agency mortgage-backed securities (MBS) remain highly sensitive to interest-rate volatility, even as volatility declined throughout May, spreads stayed elevated due to renewed attention on the privatization of government-sponsored enterprises (GSEs). Initial market jitters were tempered but not removed by assurances that the implicit government guarantee would remain intact.
• Asset-backed securities (ABS) continued to recover from April’s spread widening despite elevated issuance levels that had been delayed by prior volatility. In a shift from recent trends, utility and other ABS subsectors led performance.
• The preferreds market participated in the risk-on rally returning 0.69%, while spreads tightened 26 bps. The more interest-rate sensitive fixed-for-life preferreds meaningfully underperformed their fixed-floating counterparts given the move higher in rates across the curve.