Monthly Bond Commentary - May 2025

May was a positive month for our portfolios as markets found their footing following signs that trade tensions between the US and China are defrosting. The world's two biggest powers lowered their respective tariffs to 30% and 10% - levels unthinkable before 'Liberation Day' - and are engaged in a dialogue to establish a new trading relationship, albeit seemingly under a new regime ushered in by Donald Trump. Credit spreads tightened across the board, led by Energy and Real Estate. However, Financials led overall benchmark spread compression, as the largest sector in the benchmark and our portfolios.

Despite the rally in credit spreads during May benchmark total return was negative due to the rise in government bond yields, especially at the long-end of the curve. A prime example of this has been Japan, where the 40-year cost of borrowing rose 56bp in May to 3.68% in May prompting concerns for the sustainability of the worlds most indebted developed nation; following a successful auction of new bonds the 40-year yield retraced its move ending the month unchanged. The risk to the global financial system if long-term bond yields continue their move higher has the potential to be severe. But in our opinion it is a small, left-tail risk. Due to the many complexities in forecasting long end bond yields we have very little exposure to this section of the market helping all of our portfolios to outperform their benchmark.

Finally we should note that the US lost its last perfect credit rating following Moody's downgrade to Aa1. The market had anticipated the downgrade and there should be no ripple effects to speak of given S&P and Fitch both already rate the US Government AA+. It is a symbolic, though practically unimportant, change.