Monthly Bond Commentary - July 2025

As summer holidays get under way, financial markets quieten down and returns stagnate, or at least that's the implication of the adage "Sell in May and go away!" However, the S&P500 and Nasdaq Composite both reached all time highs in July on positive developments in tariffs - yes, we're back to the same story! - and corporate earnings. Meanwhile, government yield curves continued to steepen, led by a rally in the shorter end of the yield curve, and index level credit spreads tightened to their lowest levels since before the financial crisis. These positive drivers pushed year-to-date benchmark returns to 4.2% at the end of July, their best return at this point of the year since 2020 and twice the trailing 10-year average for this time of year!

Looking at the current drivers in more detail and starting with tariffs, as it seems to be all we talk about, Donald Trump struck a number of trade deals in the last days of July. The largest was with the European Union who will receive a flat 15% tariff and commit to purchasing $750bn in energy investing $600bn in the United States. In general, trade talks took a more positive tone in July and markets have lapped up the sentiment.

Not everything has been ideal in the US, we have recently seen signs of possible political interference in US economic data as Donald Trump fired chief of the Bureau of Labor Statistics. The firing follows a weak non-farm payrolls report and large negative revisions to previous months. Though it must be acknowledged data quality has suffered over the past 5-years and questions about economic statistics must be asked, but we should all be concerned about whether economic data becomes politicised.

Turning to second quarter earnings, results look robust so far, even for technology stocks with high earnings multiples and growth expectations. We have been focused on results from the financial sector and have seen our confidence proven out in another set of strong results. Revenue momentum in investment bank's trading businesses and net interest income close to post-covid highs has led to an increase in profitability and increased shareholder returns. We are also pleased to see strong capital adequacy, with the average CET1 ratio of major US banks at 14.5%, its highest ever level, and 14.4% for the equivalent European banks. The equivalent figures at the end of 2019 were 12.8% and 13.8%, so it is clear to see the progress made in recent years, justifying recent spread compression.