Monthly Bond Commentary - June 2025

We have repeatedly discussed geopolitical uncertainty in recent months and while this and fiscal events are still predominant drivers of bond returns it is important we consider the credit risk in our portfolios. June marks the end of the second quarter and the beginning of earnings season where we are anticipating relatively stable results from the US corporate sector caveated with warnings of cost increases if tariffs jump. We believe it is unlikely the tariffs in place since the start of April will burn through margins and cause a significant slump in earnings, but the challenge we continually return to is the uncertainty of where this could go. One bright spot is expected to be globally significant US banks who recently passed Federal Reserve stress tests with flying colours; meaning lower capital requirements and upsized shareholder returns.

Looking to the valuation instead of fundamentals, the overall yield on corporate bonds is still far in excess of the ultra-low-interest rate period but credit spreads are trading in the lowest 1% of historic levels dating back to the early 2000s. We are of course pleased to see credit spreads move tighter and drive return for your portfolio, however, we do begin to question whether risk is adequately priced when spreads are in the top percentile over a 20+ year period in spite of the geopolitical backdrop. Therefore, we have looked to reduce risk where we believe it is no longer adequately priced and increased the average credit quality of our holdings in addition to the lengthening trades we have discussed in the past.