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Fixed Income Perspectives
Strong Start Tempered by Policy Transformation
February 2025
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TRANSCRIPT
With the new year underway, fixed income markets are continuing to adjust to the effects of the Trump administration in a Republican-led Congress. This transition has led to notable interest rate sensitivity to federal policy reform, incoming economic data and the actions of the Federal Reserve.
10-Year US Treasury Yield
Source: Bloomberg U.S. Treasury Index as of 2/12/2025.
Past performance is not an indication of future returns.
Chart 1, 0:31– Since December, the U.S. treasury curve has experienced considerable volatility, with the 10-year fluctuating within a range of 65 basis points as inconsistent inflation and labor reports have driven changes in investor sentiment. Despite this volatility, fixed income markets have benefited from shifts in the shape of the yield curve, with key segments reporting solid positive total returns year to date. For example, short duration has returned 41 basis points, while intermediate investment-grade corporates and municipals are coming in around 1%. High yield and opportunistic credit continue to outpace the pack in 2025.
Fixed Income Asset Class Total Return YTD
(through 2/10/2024)
Sources: Source: Bloomberg as of 2/10/2025. Bloomberg U.S. Treasury 1-3 month T-bill Index, U.S. Corporate Intermediate Index,, Municipal Short/Intermediate 1-10Yr Index, Municipal High Yield Index, US Corporate High Yield Index, Ice BofA Diversified High Yield Emerging Market Index, Palmer Square BB CLO Index.
Past performance is not an indication of future returns.
Chart 2, 1:10– The Fed has communicated its intent to carefully weigh data against policy responses. If you recall, the Fed reduced rates by 100 basis points over three consecutive meetings beginning in September 2024. After holding the overnight lending rate steady at the January meeting to a range of 4.25% to 4.5%, the Federal Open Market Committee (FOMC) is expected to maintain rates at current levels. Further easing will depend on incoming data and renewed confidence that inflation is headed lower.
The futures market is currently pricing in one additional rate cut by year end. [City National Rochdale] CNR continues to forecast that the Fed will lower the fed funds rate by 25% to 50 basis points this year. Policy outcomes will likely become an important economic driver in the coming weeks and months. Recent tariff announcements by the Trump administration on countries such as Canada, Mexico and China may further test financial markets and weigh on the economy. As U.S. trade policy evolves and Congress deliberates on fiscal reform and the federal budget, we anticipate further volatility while investors gauge the net impact.
Fixed Income Yield Comparison
Sources: Bloomberg as of 2/10/2025. Indices used are the US Corporate Short 1-5, Municipal Short 1-5, US Corporate Intermediate 1-10, Municipal Short/Intermediate 1-10, US Corporate High Yield, and High Yield Municipal Bond.
*Municipal index yields are adjusted for 37% federal marginal tax rate + 3.8% Medicare Surcharge.
Information is subject to change and is not a guarantee of future results.
Chart 3, 2:14– From a fixed income asset allocation perspective, we expect rates to remain elevated for an extended period of time as the Fed takes a more cautious approach to monetary policy.
Yields across the market are historically attractive and could reward investors with compelling income and cash flow opportunities. We would be remiss not to acknowledge the potential for policy outcomes to impact fundamentals and market-based indicators.
With that being said, corporate quality remains broadly healthy, and a resilient U.S. economy continues to support this sector. With robust technicals and credit spreads near their historical lows, the market may not be fully pricing in policy risks that may lead to a weakening in future valuations. Tax-exempt municipal bond yields are also offering strong relative and taxable equivalent value. Furthermore, the municipal yield curve is steep, which enhances the income potential for investors extending portfolio duration.
While overall credit conditions remain stable for the municipal market, we are closely monitoring federal tax reform efforts and how potential policy pivots could impact the quality, supply and demand for the asset class.
Important Information
The views expressed represent the opinions of City National Rochdale, LLC (CNR) which are subject to change and are not intended as a forecast or guarantee of future results. Stated information is provided for informational purposes only, and should not be perceived as personalized investment, financial, legal or tax advice or a recommendation for any security. It is derived from proprietary and non-proprietary sources which have not been independently verified for accuracy or completeness. While CNR believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Actual results, performance or events may differ materially from those expressed or implied in such statements.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
City National Rochdale, LLC is an SEC-registered investment adviser and wholly-owned subsidiary of City National Bank. Registration as an investment adviser does not imply any level of skill or expertise. City National Bank is a subsidiary of the Royal Bank of Canada.
Fixed Income investing strategies & products. There are inherent risks with fixed income investing. These risks include, but are not limited to, interest rate, call, credit, market, inflation, government policy, liquidity or junk bond risks. When interest rates rise, bond prices fall. This risk is heightened with investments in longer-duration fixed income securities and during periods when prevailing interest rates are low or negative.
Index Definitions:
Bloomberg U.S. Treasury Index: includes all publicly issued, U.S. Treasury securities that are rated investment grade, and have $250 million or more of outstanding face value.
Bloomberg 1-3 Month U.S. Treasury Bill/T-Bill Index (the "Index") is designed to measure the performance of public obligations of the U.S. Treasury that have a remaining maturity of greater than or equal to 1 month and less than 3 months.
Bloomberg U.S. Intermediate Corporate Bond Index measures the performance of U.S. corporate bonds with a maturity of 1–10 years. It's part of the Bloomberg U.S. Corporate Index.
The Bloomberg Municipal Bond: Muni Inter-Short (1-10) Index is a measure of the US municipal tax-exempt investment grade bond market. It includes general obligation and revenue bonds, which both can be pre-refunded years later and get reclassified as such. The effective maturity of the bonds in the index must be greater than or equal to 1 years but less than 10 years.
Bloomberg U.S. Municipal High-Yield Index: covers the U.S.-dollar denominated, non-investment grade, fixed-rate, municipal bond market and includes securities with ratings by Moody’s, Fitch and S&P of Ba1/BB+/BB+ or below.
The Bloomberg US Corporate High Yield Index measures the performance of non-investment grade, US dollar-denominated, fixed-rate, taxable corporate bonds.
ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index tracks the performance of US dollar denominated below investment grade emerging markets non-sovereign debt publicly issued in the major domestic and Eurobond markets.
The Palmer Square CLO Debt Index (“CLO Debt Index”) (ticker: CLODI) is a rules-based observable pricing and total return index for collateralized loan obligation (“CLO”) debt for sale in the United States, original rated A, BBB, or BB or equivalent.
US Corporate Short 1-5 refers to short-term US corporate bonds with 1–5 years remaining until maturity. These bonds are part of the investment-grade corporate bond market, which is dominated by financial services issuers.
Municipal Short 1-5 refers to a collection of municipal bonds that mature between one and five years. These bonds are a type of debt obligation that pay interest that is exempt from federal income tax.
U.S. Corporate Intermediate 1-10 refers to investment-grade corporate bonds that mature between one and ten years. These bonds are denominated in U.S. dollars and are taxable.
Municipal Short/Intermediate 1-10 is a term used to describe a group of US tax-exempt municipal bonds that have a maturity date between one and ten years. These bonds can be used in a variety of investment strategies, including bond ladders and managed accounts.
© 2025 City National Rochdale, LLC. All rights reserved.
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