Download the 4.4.25 Dynamic Bond Market Update for advisors’ use with clients

By Bill Smith, Fixed Income Trader and Portfolio Manager

Fixed income performed well in Q1 2025, amid a volatile environment punctuated by an escalating trade war and uncertainty surrounding the Department of Government Efficiency’s (DOGE) efforts to reduce federal spending. For the first time since early 2020, U.S. Treasuries outperformed other fixed income indices, while tax-free municipal bonds lagged due to increased supply and tax reform uncertainty.

The charts below summarize the yield and performance of select fixed income tenors and indices as of March 31, 2025:

Source: Bloomberg. Past performance is not a guarantee of future results.

Negative Stock/Bond Correlation

As the following graph shows, stocks and bonds moved in opposite directions in the first quarter, a welcome relief for 60/40 portfolios after moving in tandem for much of 2024.  The S&P 500 index was down more than 4.50% from Dec. 31, 2024, to March 31, 2025, while the Bloomberg U.S. Aggregate Bond Index was up 2.78% during that same period.

Source: Bloomberg. Past performance is not a guarantee of future results.

Spreads Widen across Taxable Bond Indexes

While performance was largely positive across taxable fixed income in the first quarter, corporate bonds were not immune to the risk-off environment. Spread, or the additional compensation bond investors earn over Treasury yields, increased as investors demanded more yield for additional credit risk. Spreads widened 20 basis points on the Bloomberg U.S. investment grade corporate index from a one-year low of +75 to +95, while the high yield index widened more than 90 basis points to +374, as illustrated in the charts below:

Source: Bloomberg. Past performance is not a guarantee of future results.

This spread widening tempered the quarterly price returns of corporate bonds, particularly for lower rated bonds. For instance, the Bloomberg U.S. High Yield Index had a price return of negative 0.64%, as illustrated in the table below:

Source: Bloomberg. Past performance is not a guarantee of future results.

While it is impossible to know if “risk-off” will remain a driving narrative for the remainder of the year, the potential for continued volatility should make an allocation to higher quality bonds an important consideration for most fixed income investors. Regardless of how the rest of the year plays out, Q1 provided a solid reminder of the potential for fixed income to provide ballast to a well-diversified portfolio.

Fixed income. Flexible thinking.

A prudent approach to fixed income investing calls for diversification across both credit and duration exposure. As always, Dynamic recommends staying balanced, diversified and invested. Despite short-term market pullbacks, it’s more important than ever to focus on the long-term, improving the chances for investors to reach their goals.

Should you need help navigating fixed income for your clients, contact Dynamic’s Asset Management team at (877) 257-3840, ext. 4, or assetmanagement@dynamicadvisorsolutions.com.

Bill Smith serves as president, Portfolio Management & Trading, of Harmont Fixed Income in Phoenix.

Disclosures

This commentary is provided for informational and educational purposes only. The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. This is not intended to be used as a general guide to investing, or as a source of any specific recommendation, and it makes no implied or expressed recommendations concerning the manner in which clients’ accounts should or would be handled, as appropriate strategies depend on the client’s specific objectives.

This commentary is not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Investors should not assume that investments in any security, asset class, sector, market, or strategy discussed herein will be profitable and no representations are made that clients will be able to achieve a certain level of performance or avoid loss.

All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed as to its accuracy or reliability. These materials do not purport to contain all the relevant information that investors may wish to consider in making investment decisions and is not intended to be a substitute for exercising independent judgment. Any statements regarding future events constitute only subjective views or beliefs, are not guarantees or projections of performance, should not be relied on, are subject to change due to a variety of factors, including fluctuating market conditions, and involve inherent risks and uncertainties, both general and specific, many of which cannot be predicted or quantified and are beyond our control. Future results could differ materially, and no assurance is given that these statements or assumptions are now or will prove to be accurate or complete in any way.

Past performance is not a guarantee or a reliable indicator of future results. Investing in the markets is subject to certain risks including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed.

Investment advisory services are offered through Dynamic Advisor Solutions, LLC, dba Dynamic Wealth Advisors, an SEC registered investment advisor.

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