Weekly Fixed Income Update

Interest rates, inflation, central bank action—all these and more can impact fixed income. Stay on top of the market with our weekly update.

May 20, 2025

Macro update

Last week brought economic data, a republican budget proposal and a pivot in tariffs and trade that drove volatility. Equities and bond yields rose while credit spreads tightened, and strategists reduced the odds of a US recession this year.

A successful meeting between American and Chinese trade delegations concluded with both parties agreeing to de-escalate. Tariffs on Chinese goods will fall for 90 days from 145% to 30%. The effective tariff rate now appears to be 10% on global imports, 30% on China and 25% on certain sectoral products and goods.

Bond yields continue to drift higher on the expectation for continued fiscal expansion, as the House Ways and Means Committee presented its initial budget proposal, which contained many of the President’s tax cut priorities. The two-year note traded above 4%, while the 10-year note traded above 4.5%.

Key parts of the budget included the continuation of the muni federal tax exemption, the SALT cap rising to $30,000 and no 40% marginal tax rate for millionaires.

On the data front, US inflation rose less than forecast in April, with the core CPI increasing 0.2% month-over-month and 2.8% year-over-year. Headline CPI registered 2.3%. The CPI report showed a pullback in airfares, hotels, used cars, trucks and apparel, while prices of furniture and appliances increased. Fed funds futures are now pricing in less aggressive policy easing, with two rate cuts by year end, down from four at the start of the month.

April 25, 2025

Fixed income portfolio manager Kevin Lynyak shares his insights into the current bond market. Listen now:

Municipal bond update

Benchmark AAA municipal yields were mixed last week while the muni market continues its return to normalcy. Two-, five- and 10-year yields dipped two, four and two basis points (bps), respectively, while 30-year yields rose five bps.

Benchmark tax-exempt yields remain higher since the start of the year, with five- and 10-year maturities up by three and 21 bps, respectively. 30-year yields are higher by 53 bps. Benchmark 10-year yields rest at 3.27% (Refinitiv MMD, 5/16/2025).

The Bloomberg Municipal Bond Index gained 0.02% last week, cutting the negative year-to-date (YTD) return to -0.75%. Treasurys again had a negative week, losing 0.36% and limiting that YTD total to 2.06% (Bloomberg, 5/16/2025).

Muni relative value compared with the 10-year Treasury eased to 74% by Friday’s close but remains sharply above the two-year average of 66% (Refinitiv MMD, 5/16/2025).

Five- to 15-year A-rated municipal yields ranged from 3.10% to 4.19%, with related taxable-equivalent yields ranging from 5.24% to 7.08%, assuming a combined federal tax rate of 40.8% (Refinitiv MMD, Parametric, 5/16/2025).

Mutual funds experienced inflows of $769 million, with ETFs bringing in $561 million and open ends contributing $208 million. Total ETF assets under management continues to grow at a healthy pace (LSEG Lipper, JPMorgan, 5/14/2025).

This week’s municipal new-issue calendar remains plentiful, with more than $10 billion scheduled to enter the primary market and follows last week’s outsized $14 billion.

Seasonally heavy supply continues, but the return to positive mutual fund flows and the fast-approaching summer reinvestment season has been supportive of pricing. We expect that June, July and August will see a much stronger level of organic reinvestment in tax exempts. The question is whether supply will dwindle (Ipreo, ICE Data, 5/19/2025).

Corporate bond update

US investment-grade (IG) corporate yields rose across the curve last week. Two-, five- and 10-year yields increased three, four and four bps, respectively. Corporate yields are lower across the curve YTD. Two-, five- and 10- year yields are down 14, 13, and one bps, respectively (Bloomberg, 5/9/2025).

The ICE BofA 1–10 Year US Corporate Index returned 0.04% for the week and -0.54% month to date (MTD). The index outperformed like-duration Treasurys by 0.23% during the week and by 0.38% MTD (Bloomberg, 5/9/2025).

IG mutual funds and ETFs experienced inflows of $3.2 billion, an increase in flows from the previous week’s inflows of 387 million. Corporate-only funds experienced inflows of $1.16 billion, following the previous week’s outflows of $192 million (JPMorgan, 5/9/2025).

Corporate one- to 10-year IG bond yields have decreased 12 bps YTD and ended last week at 5% (Bloomberg, 5/9/2025).

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INSIGHT

Corporate Bond Market Insight

Each month we recap the corporate bond market’s performance, delving into the numbers and offering forward-looking commentary. Click below for the latest edition.

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INSIGHT

Municipal Bond Market Insight

Each month we recap the muni bond market’s performance, delving into the numbers and offering forward-looking commentary. Check out the latest edition.

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The views expressed are those of the authors and are current only through the date stated. These views are subject to change at any time based upon market or other conditions, and Parametric and its affiliates disclaim any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions for Parametric are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Parametric strategy. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Past performance is no guarantee of future results. All investments are subject to the risk of loss. Prospective investors should consult with a tax or legal advisor before making any investment decision. Please refer to the Disclosure page on our website for important information about investments and risks.

An imbalance in supply and demand in the municipal market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads, and a lack of price transparency in the market. There generally is limited public information about municipal issuers. As interest rates rise, the value of certain income investments is likely to decline. Longer-term bonds typically are more sensitive to interest-rate changes than shorter-term bonds. Investments in income securities may be affected by changes in the creditworthiness of the issuer and are subject to the risk of nonpayment of principal and interest. The value of income securities also may decline because of real or perceived concerns about the issuer’s ability to make principal and interest payments.

Corporate debt securities are subject to the risk of the issuer’s inability to meet principal and interest payments on the obligation and may also be subject to price volatility due to such factors as interest rate sensitivity, market perception of the creditworthiness of the issuer, and general market liquidity. When interest rates rise, the value of corporate debt securities can be expected to decline. Debt securities with longer maturities tend to be more sensitive to interest rate movements than those with shorter maturities. Company defaults can impact the level of returns generated by corporate debt securities. An unexpected default can reduce income and the capital value of a corporate debt security. Furthermore, market expectations regarding economic conditions and the likely number of corporate defaults may impact the value of corporate debt securities.

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