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Bonds: Near-Term Economic Pain Likely To Keep A Bid Under Treasuries

2025 de marzo

Core investment-grade bonds have performed quite well up to this point in 2025, with the Bloomberg Aggregate Bond Index higher by 2.7% year-to-date through February, followed closely by the Bloomberg U.S. Corporate Index which has rallied a respectable 2.6%. Fears of an economic slowdown have put a bid under high quality bonds, and Treasury yields across the curve have fallen to start the year, retracing much of the upward move made throughout the fourth quarter of 2024.

In President Trump’s first term, he consistently cited and tied his ‘wins’ to the stock market’s gains. However, both the President and Treasury Secretary Scott Bessent were noticeably silent as stock prices fell in the back-half of February and into March, and the administration appears to be more focused on the Treasury market this time around. The pair have repeatedly voiced their willingness to see Treasury yields, specifically the 10-year yield, fall to unlock or thaw the housing market where a combination of high prices and higher interest rates have effectively shut out new buyers. Some near-term economic pain is perhaps the only path to achieving this aim as it would lower consumption/demand and force investors into safe-haven U.S. Treasuries, pushing yields/rates lower and weakening the U.S. dollar. February’s softer economic data could be viewed by the administration as a means to an end, and if some degree of economic pain is going to be tolerated, then economic surprises are more likely to be to the downside in the coming quarters. Thus, we see little reason to reduce exposure to Treasuries with this backdrop in place. Investment-grade corporates, on the other hand, which have also benefited from falling Treasury yields, hold less appeal as credit spreads are still tight by historical standards and potentially fail to adequately compensate investors for taking credit risk into an economic slowdown.

Some Signs Of Caution Coming From Credit. Credit spreads widened in the back-half of February as tariff rhetoric ramped up, consumer confidence flagged, and investors were presented with more signs of cooling in the labor market. However, while valuations for investment-grade (IG) corporate bonds have cheapened only modestly up to this point, the drawdown in riskier higher yielding corporate bonds (HY) has been deeper with the spread over the U.S. Treasury curve for the Bloomberg U.S. Corporate High Yield Index now 50-basis points above its mid-February low. Higher yields appeared to initially draw investor capital back into these bonds in early March, reversing some of the widening in spreads last month, but the selloff appeared to pick up steam mid-month as the S&P 500 approached a nearly 10% peak-to-trough decline. Fears of a U.S. economic slowdown could persist and weigh on consumer spending, business investment, and hiring in the coming months, potentially leading to downward revisions to earnings estimates. This backdrop would likely force credit spreads wider and weigh on valuations for lower quality corporate bonds, but active managers could be best positioned to sift through the wreckage and take advantage of further weakness in this segment of the bond market.

Opportune Time To Lower Exposure To Emerging Market Debt In Favor Of Developed Market Sovereigns. At the end of February, the Bloomberg EM USD Aggregate Bond Index had turned out a 9.6% total return over the trailing year, lagging only the Bloomberg U.S. Corporate High Yield Index’s 10% return among the major fixed income segments we track. However, trade/tariff uncertainty will likely weigh on global growth for quarters to come. With lofty valuations and upside from tighter credit spreads likely limited from here, this appears to be an opportune time to reduce, but not eliminate exposure to U.S. dollar denominated emerging market debt in favor of developed market sovereigns abroad.

U.S. dollar-hedged developed market sovereign bonds currently offer U.S. investors a higher yield relative to U.S. Treasuries, broadly speaking, and the credit profile is similar to that of many domestic investment grade issues. We have been under-allocated to developed market sovereigns in recent years as yields were unappealing on both an absolute or relative basis versus U.S. Treasuries, and the U.S. dollar’s strength versus the euro, yen, and British pound in the post-COVID environment has been a headwind for upside from exposure to foreign bonds. But this dynamic has shifted in recent quarters and yields on developed market sovereigns are more attractive and should the U.S. dollar continue to slide on economic growth concerns, U.S.-based investors would benefit from diversification via exposure to assets tied to foreign markets and currencies.

Al 11 de marzo de 2025