June Volatility Implications for Fixed Income Investors

What Happened?

June was another headline-heavy month, with market sentiment shifting rapidly in response to evolving inflation, geopolitical developments, and fiscal headlines. The month began with a milder-than-expected inflation print, followed by a geopolitical shock in the Middle East that pushed oil prices up by almost $15 per barrel in just 15 days. Investors seesawed between safe-haven positioning and post-tariff optimism, before focus ultimately turned to the approval of the administration’s sprawling tax and spending bill at the Congress. By month-end, markets had broadly calmed, with a notable drop in implied volatility across all asset classes—though for different reasons. Equities were supported by easing geopolitical tensions and steady guidance, while bonds responded to softer inflation momentum and renewed hopes for a potential Fed pivot.  

From a macroeconomic standpoint, core inflation continued to moderate on a forward-looking basis, though the Fed made clear it is not yet ready to declare victory. The table below shows annualized monthly core PCE inflation, reinforcing the trend of resumed disinflation:

Despite the improving inflation trajectory, the Fed held its benchmark rate steady at the June 18 FOMC meeting, and raised its year-end Core PCE forecast to 3.1% (from 2.8% in March), explicitly citing tariff-related risks. (In retrospect, Fed Governor Waller did indeed justify the Fed’s cautious stance on June 1st, noting: "Before the recent shift in U.S. trade policy, inflation had been making consistent, but uneven, progress over the past two years toward our 2 percent goal. While that progress seemed to stall at the beginning of 2025, it has resumed over the past two months.")

In the back half of the month, as the Middle East conflict de-escalated, the tone shifted toward “slower but steady” growth. Volatility fell sharply, and bond markets responded to softer inflation and ongoing hope for any signs of labor market cooling that could justify swifter future easing.

Reference yield changes for the month:

• 5-year Treasury: 3.96% → 3.80%
• 5-year AAA muni: 2.84% → 2.68% (Taxable Equivalent Yield ~4.53%)
• 10-year Treasury: 4.40% → 4.23% 
• 10-year AAA muni: 3.33% → 3.28% (Taxable Equivalent Yield ~5.54%)

Reference Risk/Return snapshot for the month:

All yield figures represent gross market yields and do not reflect the impact of fees or expenses. Index performance is not indicative of the performance of any particular investment. Indexes are unmanaged and their returns do not take into account any of the costs associated with buying and selling individual securities. Individuals cannot invest directly in an index. Past performance is not indicative of future results.

What Are We Thinking?

As the budget resolution bill heads from the Congress to the White House, markets are weighing the potential growth boost from tax cuts against the contractionary drag of tariffs. The interplay between these two forces will be critical for both equity and fixed income investors. On one hand, the bill aims to stimulate growth—while balancing that with phased-in spending cuts to preserve long-term fiscal discipline. On the other hand, tariffs play an important role as a form of offsetting revenue, helping to contain the federal deficit.

That balancing act is now central to the outlook for term premium (the bond market’s compensation for long-term fiscal uncertainty) and the Fed’s future policy path. A sustained shortfall in federal revenues—without credible offsets—could prolong high interest rates and push the government’s interest burden higher. Early projections seem to suggest the new spending bill combined with expected tariff revenue would not increase the federal deficit alarmingly.

While the impact of tariffs, understandably, has not yet shown up in the economic data, recent earnings calls continue to suggest that price increases may be on the way, and consumers and businesses remain understandably cautious from a future economic growth perspective.

So far, corporate bonds have outperformed, supported by solid fundamentals and strong demand for attractive all-in yields. From a municipal bond standpoint, the start of the summer issuance lull creates a constructive technical backdrop. We expect tax-exempt bonds to play catch-up to taxable counterparts over the coming summer months.

Bottom Line: June marked a strong month for nearly all asset classes. We continue to expect a constructive fixed income environment in the second half of the year, especially as investors weigh the durability of fiscal support against rising issuance needs and evolving monetary policy dynamics.