INSIGHTS

On July 11, 2025

Never a Dull Moment

Extraordinary volatility in the wake of April’s “Liberation Day” tariff announcement left the equity markets on the brink of bear market territory. However, implementation delays and softening rhetoric helped propel the markets to record levels by the end of the quarter as investors shrugged off the dire scenarios of an imminent global recession. Even the boiling over of Iran/Israel tensions in the 12-day War failed to dampen investor sentiment. By the end of the quarter, the S&P 500 had risen 24.9% from its post- “Liberation Day” nadir, while the NASDAQ surged 33.6%, the fastest rebound from a 15% decline on record. While the U.S. economy appears resilient, with inflation trending lower and employment remaining strong, concerns over the size and sustainability of the U.S. debt and deficit have come back into focus. Concurrently, the Fed has been reluctant to cut interest rates until there is further clarity on the inflation impact from new tariffs, which subsequently provided 6% of the U.S. government’s income in May. The average tariff paid on imports, even after delays and rollbacks, is now 18.8%, the highest level since the 1930s. With the recent passage of the “Big, Beautiful Bill,” the expectation for lower interest rates in the fall, and the burgeoning AI (Artificial Intelligence) revolution, the U.S. economy appears poised for meaningful GDP growth over the next several years. However, given political friction and uncertainty, investors must live by the mantra “Never a Dull Moment!”

TRENDING TOPICS

Tariffs are currently the dominant X factor in the global economy. Trade negotiations are protracted and complex, which has resulted in another round of implementation delays until August 1. In the end, the cost of imports will be sharply higher, with most estimates settling in the 15% range, a marked increase from the 2.3% average in 2024. It is apparent that the primary target of higher tariffs is China and its associated trade deficit with the U.S. Successfully isolating China will require solid trade relationships with Japan, South Korea, and the European Union. Until these trade negotiations are settled, corporations may be reluctant to execute on their capex plans. The U.S. dollar suffered its worst six-month decline in half a century — apparent collateral damage from unresolved trade showdowns. The dollar has declined 10.7% versus major global currencies. The weakening dollar has made U.S. exports much cheaper, which should boost domestic manufacturing while helping reduce the sizeable trade deficit.

The U.S. debt burden is now coming into greater focus with the Fed’s reluctancy to cut rates continues to compound the issue. The great irony is that the largest single holder of U.S. debt is the Federal Reserve, which holds approximately $4.2 trillion in Treasury bills, notes, and bonds on its balance sheet following several rounds of QE (quantitative easing) during the Global Financial Crisis (GFC). Notably, the Fed’s holdings totaled just $500 billion prior to the GFC and is projected to increase to nearly $10 trillion over the next decade.

Exhibit 1 shows returns for various indices for June, Q2, and year-to-date.

ECONOMIC UPDATE

The U.S. economy continues to defy expectations by successfully absorbing the Trump Administration’s frequent policy fluctuations. Frequent shifts in policy have left consumers on edge, which has become more apparent through recent undulations in consumer sentiment. The Conference Board’s index of consumer confidence slumped 5.4 points to 93 in June after jumping more than 14 points in May following five consecutive monthly declines. The present conditions and expectations for the next six months components declined by 6.4 and 4.6 points, respectively. Concurrently, the share of consumers responding that jobs were plentiful declined to 29.2%, the lowest level in more than four years. New home sales plunged 13.7% in May to a 623,000 annualized rate, according to the U.S. Census Bureau, the sharpest decline in almost three years and a seven-month low in sales. U.S. consumer spending also weakened in May by the most since the start of the year, further highlighting the impact of policy uncertainty. Personal consumptions expenditures (PCE) declined by an inflation-adjusted 0.3%, according to the Bureau of Economic Analysis. The core PCE price index (excludes food & energy) rose 0.2%. Spending on services also declined to the lowest level since the onset of the pandemic, contributing just 0.3% to GDP in the first quarter. One tailwind for reducing inflation has been lower energy prices. OPEC+ (Organization of the Petroleum Exporting Countries Plus — 12 OPEC members and 10 of the world's major non-OPEC oil-exporting nations) recently agreed to increase production by another 548,000 barrels per day (bpd), well above the forecasted 411,000 bpd, as the organization continues to unwind the 2.2 million bpd production cut initiated in November 2023. The final 550 million bpd is set to resume in September, bringing production back to pre-cut levels. The added capacity should keep oil prices at bay, which should temper top-line inflation.

HIGH YIELD UPDATE

The high-yield market posted its strongest monthly gain in 11 months as capital markets activity rebounded further, and equities soared. The ICE BofA US High Yield Index (H0A0) rose 1.86% in June to end the second quarter with a gain of 3.57% and bringing the year-to-date return to 4.55%. For context, 10-year Treasuries, as measured by the ICE BofA Current 10-yr U.S. Treasury (GA10) index, rose 0.98% in the second quarter while investment grade bonds gained 1.79%, according to the ICE BofA U.S. Corporate (C0A0) index.

Returns by rating showed a modest bias toward riskier credits in the second quarter after notable underperformance in the prior quarter. Specifically, CCC-rated bonds gained 4.28% in Q2, outpacing gains of 3.47% and 3.46% for single-Bs and BBs, respectively, according to the H0A0 index. Despite the quarterly rebound, CCCs still trail higher-rated cohorts on a year-to-date basis. Specifically, BBs and single-Bs have risen 4.97% and 4.20% year-to-date, respectively, while CCCs gained 3.58%. High yield bond capital markets activity accelerated in June with $36.7 billion coming to market in 44 transactions, the highest monthly volume since September 2021, according to JPMorgan. Despite the robust monthly volume, year-to-date issuance of $145.6 billion trails the same period last year by 12%. The leveraged loan market gained 0.80% in June, according to the Morningstar LSTA US Leveraged Loan Index, closing the quarter with a gain of 2.31% and bringing the year-to-date return to 2.81%. Robust CLO (collateralized loan obligations) originations, steady inflows, and active capital markets have helped buoy the asset class. Leveraged loan primary market activity jumped to $66.2 billion ($19.6 billion net of refi/repricing) in June following two tepid months of issuance, according to JPMorgan. For context, 2024 monthly average issuance totaled $110.6 billion. Year-to-date gross issuance of $440.7 billion marks a 27% decline compared to the same period last year while net issuance of $71 billion was 44% above the 2024 run rate. Concurrently, gross and net CLO formations totaled $44.1 billion and $15.9 billion in June, respectively.

MARKET OUTLOOK

Investors are keenly focused on the outcome of trade negotiations with our major trading partners. Pressure is mounting for President Trump to resolve his high-profile trade brinksmanship and investors may begin to lose patience. Another pivotal factor over the next several months will be Fed policy. Pressure is also mounting for Fed Chair Powell — whose term concludes in less than a year — to slash rates, but he is hesitant until the impact of tariffs becomes more clear. The underlying question is, “Who will absorb the brunt of the new tariffs: exporting manufacturers, importing corporations, or the end consumer?” The next Fed Chair will be a critical appointment for the Trump Administration, which is eager to see substantial rate cuts. What is most unusual, based on past policy, is the current Fed funds rate of 4.5% being substantially higher than the current rate of 2.7% PCE inflation, another indication that the Fed is keeping rates too high for too long. Over the next several months, investors will be closely monitoring corporate earnings and payroll data, which remain on solid footing but are predicted to see declines in the second half of the year, according to the notoriously unreliable economic prognosticators. The opportunity set in the high-yield market appears favorable despite tight spreads. Default rates remain below average, and demand for income-producing, diversifying instruments is strong. In light of lingering uncertainties and unpredictability, “Never a Dull Moment” may be the theme for the second half.

CRN: 2025-0711-12715 R

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