Download the 07.11.25 Dynamic Q2 2025 Bond Market Update for advisors’ use with clients
By Bill Smith, Fixed Income Trader and Portfolio Manager
Despite a volatile start, fixed income broadly performed well in Q2 2025. Inflation continued to moderate, and while the U.S. Federal Reserve (Fed) held rates steady in May and June, the expectation for rate cuts later this year remain high. This solid performance was further supported by monetary easing from several other central banks, including the European Central Bank, the Bank of England, the Bank of Canada, and the central banks of Switzerland, Sweden and Norway. U.S. investment-grade and high-yield corporate bonds outperformed on both a quarterly and year-to-date basis, while municipal bonds lagged amid heavy new issuance, posting negative returns over both periods.
The charts below summarize the yield and performance of select fixed income tenors and indices as of June 30, 2025:
Source: Bloomberg. Past performance is not a guarantee of future results.
Volatility Gives Way to Opportunity
Volatility surged at the start of Q2 2025 following President Trump’s April 2 “Liberation Day” as reciprocal tariffs heightened fears of higher inflation and slower global growth. The ICE BofA MOVE Inde — a widely followed measure of bond market volatility — briefly hit 140 on April 8, well above its 10-year average of 80. However, conditions stabilized in the weeks that followed, as the administration announced a 90-day delay of most reciprocal tariffs, allowing markets to grow optimistic about a de-escalation in trade tensions, as shown in the chart below.
Source: Bloomberg. Past performance is not a guarantee of future results.
Similar swings were also seen in the corporate bond market, where spreads, or the additional compensation bond investors earn over Treasury yields, tend to rise as uncertainty increases. Data from early April showed spreads for both high-yield and investment-grade corporates spike, only to trend significantly lower over the remainder of the quarter. The Bloomberg U.S. investment grade corporate index ended the quarter at +85 over Treasury yields, 36 basis points below April highs, while the high yield index tightened more than 150 basis points to +323, as illustrated in the charts below.
Source: Bloomberg. Past performance is not a guarantee of future results.
This tightening helped drive strong returns for lower-rated bonds, reversing the trend in Q1 of higher-rated outperformance. For example, the Bloomberg U.S. High Yield Index returned 3.53% in Q2, compared to 0.85% for the Bloomberg Aaa Corporate Index, as shown in the table below.
Source: Bloomberg. Past performance is not a guarantee of future results.
Despite ongoing geopolitical tensions, fixed income delivered solid results in Q2, underscoring the importance of diversification in a shifting macro environment. As we move into the second half of the year, markets will remain focused on the trajectory of inflation and developments in trade policy. While volatility is likely to remain high, attractive yields continue to create compelling opportunities across fixed income sectors.
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.