Market Review and Outlook
The U.S. Corporate Bond market found itself at a pivotal moment at the end of Q1 2025, given a unique combination of
geopolitical and policy-related developments. According to a Bloomberg survey of economists, the probability of a recession over the course of the next year rose during the first quarter. Throughout January and most of February this indicator was at 20% but then it rose steadily to 30% by the end of March (source: Bloomberg 3/31/25).
The Friday, January 10 jobs report surprised on the upside following Thursday’s stronger than expected job growth in the BLS’s December employment report. The market reaction was a continued rise in longer term interest rates.
The September inflation report issued by the Labor Department reports the consumer price index rising 2.4% from a year ago and the core index rising 3.3%. Both were, slightly above economists’ forecasts.
What a difference a few months makes. As noted in previous letters many at the Federal Reserve and private sector economists believed the trend to lower inflation to the FED’s 2% target would be bumpy. That has certainly been the case of late.
In our previous letter in January we noted that the trend to lower inflation and interest rates will be bumpy as it usually is. The consensus then pointed toward lower yields ahead driven by perceptions of a slowing economy both here in the U.S. and abroad.
Since the bond market low in mid-October 2023, a strong rally ensued. The 10-year Treasury yield fell from 4.99% to 3.79% on December 27, 2023 (source: Bloomberg 1/17/24). Investor’s expectations of future interest rates drive the market.
With interest rates reaching levels not seen since since 2007, divergent outlooks are increasing. On the one hand, a recent article noted that some money managers are betting against the corporate and high-yield bond markets by shorting the larger and more liquid exchange traded funds (source: Bloomberg
10/16/23).
The Federal Reserve’s aggressive campaign to reduce inflation to its acceptable target of 2% is clearly bearing fruit. Earlier in July, on 7/7/23, the Bureau of Labor Statistics reported declining job growth with nonfarm payrolls increasing 209,000, below consensus estimates.
”Since the full impact of monetary policy actions can take as much as 18 months to work its way through the economy, we will continue to look closely at available data to determine what, if any additional actions we may need to take.” (Patrick Harker, Philadelphia Fed 4/11/23 source: Bloomberg)
“It may be a mild recession. It may not be.” (Jamie Dimon, JP Morgan Chase CEO on a call with reporters as reported in The Wall Street Journal 1/14/23)