In a quarter that saw both a violent selloff and a similarly intense rally in risk assets, high-quality fixed income bent, but did not break, closing Q2 with gains in the 1.5% range. This puts intermediate bond strategies on track for 5-6.5% returns for 2025 nicely serving their purpose in our diversified asset allocation for clients.
We are comfortable with the current positioning in our two core strategies of Short and Intermediate duration (SD & ID) with portfolios generally short of benchmark duration, but overweight corporate exposure. This short duration positioning (inside 2 years in SD accounts and in the 3.5-year range for Intermediate accounts) has muted the pain in the frequent long end rate spikes, while participating in the recent front-end rally and re-tightening of corporate credit spreads. We also have been rewarded in favoring front-end corporates over municipals as the municipal market has been under pressure, especially on the long-end. Investment Grade are -0.8% YTD while IG corporates are +4.2% YTD.
On the macro front, there is plenty of uncertainty as Trump has been increasingly vocal with his disapproval of Fed Chair Powell and his refusal to cut overnight rates. With Powell’s term ending inside 12 months, Trump’s pressure seems to be finally having a bit of an effect. Expectations of cuts are up to almost 3 by the end of the year. There is more uncertainty in how longer-end rates react as short-term yields decline, especially given the growing deficit and Government debt load. This has clearly has impacted the dollar, which is down 11% YTD. We would prefer to stay out of the long-end fray until it is glaringly attractive. The tariff impact is still far from clear. Trump’s “Big, Beautiful Bill” is certainly not deflationary, and there are pockets of the inflation readings that remain sticky.
In spreads, IG credit widened out to 81bps on the generic index from historic tights and have now tightened all the way back to the low-50s. Our front-end corporate buys in late-March to early April were well-timed and helpful to returns. We continue to find short-dated corporate exposure attractive given the elevated levels of the front-end and the benign IG credit environment. IG new issuance is also tracking at $1.5T for 2025, a record pace, which gives us comfort in our near-maturity positions.
We continue to position clients conservatively in fixed income given the macro uncertainty at play and changing dynamics in U.S. Government debt. We anticipate more periods of opportunity to safely bolster returns, as we did in Q2, in the coming quarters and years.
