In this piece, we take key points from our firm's most recent Bond Policy Meeting and share them with our readers. Hopefully, this piece will provide some insight into the economy and fixed income markets and give you a sense of how our team is thinking about recent trends and developments.
Crawford Bond Policy
- Geopolitical flashpoints in the Middle East, continued negotiations over the budget and tax reform (Big Beautiful Bill), and tariff negotiation deadlines will be prime influences on the bond market over the near-term.
- The Fed has been clear it will conduct monetary policy cautiously given the unknown inflation impacts from the ultimate implementation of tariff policy, as opposed to anticipating the most likely outcome.
- Otherwise, given recent inflation and employment data, they would have room to continue rate normalization.
- We believe we are in the same rate and economic cycle. While Fed rate policy is still restrictive, it will likely resume normalizing as tariff and fiscal policy details become clearer.
- Consequently, we will continue to maintain our defensive positioning, including an above benchmark allocation to defensive corporate industry sectors, agency, and municipal credits.
- We will continue to manage yield curve positioning and consequent duration toward the longer/higher end of our intermediate range.
- This has allowed for the capture of higher yields and positioning for total return potential with the increased probability of lower interest rates at a future point in the cycle.
- We view current Municipal yield levels to be very attractive on an absolute and relative basis.
- If the U.S. 10-year Treasury yield moves appreciably above 4.50% due to effects associated with tariff and/or fiscal policy implementation, we will look to extend a portion of our Core bond strategy toward the longer-end of our 15-year maximum maturity spectrum into Government and/or Municipal bonds.
Treasury Yields as of 6/23/2025
- U.S. Treasury security yields were unchanged to modestly lower over the period between May and June Bond Policy meetings.
- The most pronounced movement occurred on the front-end of the curve with one and two-year inflation expectations falling 40 and 23 basis points, respectively.
- This was driven by the market pricing-out expectations for Fed rate cuts which were more than offset by increased Real Yields.
- Factors influencing the bond market since early May include the continued evolution of Tariff policy and the Moody’s downgrade of the U.S. Treasury debt rating.
- Tariff policy remains fluid, but the 90-day hiatus and consequent de-escalation of the trade war with China on May 12th provided some relief to market.
- July 9th and the end of the 90-day reprieve for tariff policy with trade partners outside of China looms large as potential market mover.
- The Moody’s downgrade was reflective of the lack of Federal debt and deficit management over the past decade combined with the expected impacts of higher interest rates, increased entitlement costs, and reduced revenue generation as the Tax Cut and Jobs Act is extended.
- Treasury security term premiums continue to reflect fiscal management uncertainty, pulling longer-term interest rates higher despite softer employment and inflation data.
Investment Grade Corporate Bond Market as of 6/23/2025
- Investment-grade corporate yield spreads continued to tighten following the “Liberation Day” peak despite an increased probability for recession being maintained.
- Absolute yield levels continue to support overall demand with new issuance metrics comparable to 2024 averages and volume up ~ 3%.
- Fundamentally, high-grade non-financial issuers demonstrated improved financial metrics in the first quarter of 2025 with EBITDA growth, margin expansion, reduced leverage, and higher interest coverage.
Municipal Bond Market as of 6/23/2025
- Extraordinary new issue supply has been the main story in the high-grade municipal bond market between May and June Bond policy meetings.
- The first two weeks of June set record issuance levels as the second and fourth highest in history.
- Year-to-date tax-exempt supply through mid-June is 19% higher than the same period in 2024 and 53% above the trailing 5-year average.
- Issuers have been motivated to come to market ahead of any potential threat to tax-exemption as part of a revenue strategy for the budget bill. While this issue is raised in every budget process, the sense of desperation to generate revenue in this instance seemed to elevate the threat level.
- Demand for Municipal Bonds has remained very strong driven by attractive absolute yield levels, despite record issuance.
- This is demonstrated by retail investor fund flows which have experienced 39 positive net inflow days (as of June 20th) out of the past 41.
- Municipal bond “AAA” scale yields declined across the 1 to 10-year maturity spectrum reflecting the impact of investor demand, while the long-end increased in sympathy with the Treasury market.
- Fundamentally, the municipal bond market remains in very sound shape with all major revenue streams, including individual income taxes, property taxes, sales taxes, and corporate income taxes, exhibiting year-over-year growth in the 1st quarter.
DOT Plot and Summary of Economic Projections (SEP)
- Economic projections in the SEP deteriorated across the board with forecasts for higher inflation, higher unemployment, and lower growth. These projections were estimated in a meaningfully uncertain environment with respect to trade, immigration, and fiscal policy.
- The median DOT projections for 2025 rate policy skewed “hawkish” relative to March forecasts. The median expectation for two cuts in 2025 was a surprise with many expecting just one cut.
- There was no change in the long-run Fed Funds median projection. A proxy for the neutral rate, this number has moved up over the past year, from 2.5% to 3%.
Disclosures:
Crawford Investment Counsel (“Crawford”) is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about Crawford, including our investment strategies, fees, and objectives, can be found in our Form ADV Part 2and/or Form CRS, which is available upon request.
The opinions expressed are those of Crawford. The opinions referenced are as of the date of the commentary and are subject to change, without notice, due to changes in the market or economic conditions and may not necessarily come to pass. There is no guarantee of the future performance of any Crawford portfolio. Crawford reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs.
Material presented has been derived from sources considered to be reliable, but the accuracy and completeness cannot be guaranteed.
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