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Fixed Income Perspectives
Bonds Navigate an Evolving Policy Landscape
March 2025
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- Fixed Income Perspectives MARCH 2025.pdf
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TRANSCRIPT
We are now midway through March. The primary driver of volatility continues to be policy uncertainty as tariffs take center stage.
Within fixed income, sentiment has shifted, as market participants are now more concerned about the potential for federal policy actions to slow growth.
This has been aided by commentary from the Trump administration that the economy now faces a period of transition as it moves away from deficit finance growth to a more private-based model.
US Treasury Yield Curve
Source: Bloomberg U.S. Treasury Index 10-Year as of 1/14/2025 and 3/13/2025.
Past performance is not an indication of future returns.
Chart 1, 0:42– This is evident in U.S. treasuries, where yields today are lower across the curve after peaking in mid-January as the markets were balancing expectations for strong economic activity and the possibility of higher inflation.
This change in investor behavior has also led traders to increase their bets for Fed easing from forecasting one cut to the overnight lending rate to at least three cuts in the second half of the year.
Fixed Income Asset Class Total Return YTD
(through 3/11/2025)
Source: Bloomberg as of 2/11/2025. Bloomberg US Treasury 1–3-month Tbill Index, US 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, 0:1:07– Against this backdrop, we're seeing the fixed income markets remain resilient and benefit from risk off of market periods and declining yields.
Year to date, performance for key segments is positive, with intermediate, municipal and corporate bonds returning just over 1.5%.
Within high yield and opportunistic income, attractive starting yields have cushioned rate volatility, helping generate positive returns here as well.
One thing we continue monitoring is credit spread, or that extra yield an investor requires for taking on various risks.
Credit spreads for taxable and tax-exempt bonds have bounced around multiyear lows for quite some time. Solid issuer fundamentals and underlying economic strength provide price support.
US Investment Grade and High Yield Corporate Spreads
Source: Bloomberg US Aggregate Corporate Average OAS and Bloomberg US Corporate High Yield Average OAS as of 3/11/2025.
Past performance is not an indication of future returns.
Chart 3, 1:52– Looking at the corporate market, we are beginning to see a normalization in spreads that translates into more attractive valuations.
Concerns over the impact of trade policy has allowed spreads to widen modestly from mid-2024 lows.
But the pricing of risk has held nicely in this environment, and we would view any dislocation as a compelling entry point for longer-term investors.
Similarly, the municipal bond market has also experienced solid price and spread support.
Improvements in credit quality over the past several years from pandemic-era stimulus and strong budget performance have bolstered the balance sheets for many issuers, leading to upgrades exceeding downgrades for four consecutive years.
Moody's Historical Upgrade-Downgrade %
Source: Moody’s “Rating Revisions 2024 Upgrades Surpass Downgrades For Fourth Straight Years,” dated February 14, 2025.
Past performance is not an indication of future returns.
Chart 4, 2:35– The pace of upgrades is likely to moderate as risks to the market and economy evolve, but we're closely monitoring how federal policy changes and potential tax reform can impact the broader market.
But we anticipate issuer quality to largely remain resilient.
With this in mind, we expect security selection to play a more prominent role in sourcing opportunities.
To wrap up the discussion today, we currently view the overall U.S. growth outlook as constructive.
Despite softening investor confidence, underlying wage and income indicators suggest consumer fundamentals remain intact.
Policy uncertainty does continue to dominate the market, with tariff threats now becoming tangible realities.
However, the full policy landscape has yet to emerge, as deregulation, tax policy and the budget remain key unknowns.
At City National Rochdale, we continue to forecast between one or two Fed cuts this year and longer-term yields to remain range bound near 4%.
While yields remain attractive across various fixed income asset classes and credit fundamentals are intact, should spreads widen as the market reprices risk, we would view dislocation as an opportunity for investors.
We continue to reinforce security selection in the current market environment.
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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