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
- In view of the myriad unknowns and lack of predictability in the current fiscal policy climate, our Bond Policy remains unchanged.
- Our outlook is cautious with a watchful eye on the possibility for recession as the likelihood has increased at the margin.
- We remain defensively biased with respect to issuer-type and industry sector.
- We believe absolute yields currently attainable in our Core and Municipal strategies remain very attractive.
Treasury Yields as of 3/27/2025
- U.S. Treasury security yields fell across the curve since our January Bond Policy meeting primarily driven by declines in real yields as the market priced in two to three Fed Funds rate cuts and economic growth expectations faded.
- TIPS (Treasury Inflation-Protected Securities) breakevens in the 2-year maturity range moved higher due to inflation concerns over tariff policy actions and rhetoric.
- It is interesting to note market inflation expectations did not move meaningfully higher beyond two years. This is in keeping with the Fed’s baseline assumption regarding the short-term influence of Tariffs on inflation.
- U.S. economic data since late January is consistent with a slowdown, not a downturn.
- A cyclical downturn typically forms when a negative feedback loop develops between hard and soft economic data. This is why stock market behavior is an important harbinger of future hard data based on it guiding the marginal propensity of upper income households to consume.
- The top two wealthiest income quintiles account for over 61% of total expenditures in the U.S. According to recent consumer sector and credit card company data, weakness has spread to upper income consumers.
- Since the beginning of the year, policy uncertainty has dominated the economic atmosphere and prevented U.S. companies from making long-term plans, resulting in reduced capital expenditures which is a headwind to growth.
- If the goal of the administration is to deleverage the economy from the public sector and, in the process, potentially engineer a recession, it is reasonable for both corporate investors and retail consumers to err toward lower investment and consumption. This is nature of a negative feedback loop.
- Tariffs set to go into effect on April 2nd could have profound influence on inflation and GDP in the U.S. The actual range of policy outcomes is wide.
Investment Grade Corporate Bond Market
- Historically tight yield spreads in the high-grade Corporate bond market are supported by the current high level of Corporate profits relative to GDP.
- The low interest rates of the post-GFC cycle provided U.S. Corporate bond issuers the ability to term-out their debt and has shielded them from the rise in yields over the last few years.
- Threats to maintaining this strong financial positioning include:
- Having to refinance in a higher-for-longer rate environment
- De-globalization and immigration reform elevating wage costs
- Threats to supply chains from geopolitics
- A weaker consumer (particularly the upper two income quintiles of the U.S. population which account for ~62% of total expenditures)
- Continued support for current spread levels are supported by:
- Supply – Capex and M&A activity remain subdued based on the lack of government immigration and tariff policy clarity.
- Demand – Absolute yield levels continue to attract strong investor demand as illustrated by the following new issue metrics.
Municipal Bond Market as of 3/27/2025
- Municipal bond “AAA” scale yields moved higher across the curve since our January Bond Policy meeting.
- Recent upward pressure on yields has been driven by a combination of heavy new issue supply, a lower volume of maturing bond redemptions, tax-related selling, and retail fund outflows.
- We view this as an excellent opportunity to take advantage of relative value.
DOT Plot and Summary of Economic Projections
- The median DOT projections for rate policy resulted in the same levels projected in December, however, the DOT dispersion illustrates a hawkish shift:
- 9 projected two cuts this year vs. 10 in December
- 8 projected one or no cuts vs. 4 in December
- 2 projected three cuts vs. 5 in December
- The neutral remained at 3% after having moved up from 2.50% at the end of 2023 due to increased Federal debt and deficits and the reduced globalization of supply chains.
- The Summary of Economic Projections showed median expectations for economic growth falling 0.40% in 2025, while Core inflation expectations moved 0.30% higher, suggesting a “stagflationary” outlook for the balance of the year.
- The expectation for two cuts of 25 basis points for the remainder of 2025 was maintained.
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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