Asset Management
May Volatility: Implications for Fixed Income Investors
June 05, 2025
What Happened?
May brought another round of headline-driven volatility to the fixed income market. Early in the month, the S&P 500 rallied on reports of backchannel discussions around potential trade agreements. Meanwhile, the Federal Reserve maintained its wait-and-see stance, leaving benchmark interest rates unchanged at its May 7 meeting. The tone shifted more decisively on May 11, when the U.S. and China announced a major 90-day de-escalation in tariffs. While this easing of trade tensions provided relief across risk assets, Fed speakers continued to raise the bar for future rate cuts, citing persistent uncertainty around growth, jobs, Despite continued strength in hard economic data, concerns have grown around the recent drop in consumer sentiment, with markets watching closely to see if this leads to more precautionary saving and slower consumer spending. Although headline CPI remained mild at 2.3% year-over-year, the positive sentiment proved short-lived. Late in the month, Moody’s downgraded the last remaining AAA rating of U.S. sovereign debt to Aa1, citing fiscal discipline concerns, tax policy uncertainty, and the risk of elevated Treasury issuance. The downgrade triggered further weakness in longer-dated Treasuries. These developments have kept investor attention squarely focused on the long end of the yield curve, with markets increasingly pricing in fiscal risk and duration pressure. Reference yield changes for the month:
Reference Risk/Return snapshot for the month: |
What Are We Thinking?
The current market environment reflects a clash between solid economic momentum, evolving tariff policy, fiscal uncertainty, and shifting sentiment. While headline data remains strong, guidance from earnings calls and pricing trends suggests that price increases may be returning, contributing to business and consumer anxiety.
On trade, the recent softening in tariff rhetoric may offer short-term relief—but the risk remains that tariffs could ultimately weigh on growth enough to justify Fed rate cuts later this year.
From a fiscal perspective, tariffs act as a form of fiscal contraction, while proposed tax cut extensions represent fiscal stimulus. The recent House proposal includes back-loaded spending cuts beginning in 2029, potentially providing an initial boost to growth. While details remain uncertain and the final outcome will depend on Senate negotiations, markets have begun to price in the possibility of deficit-financed tax cuts—a scenario that could materially worsen the supply-demand imbalance, particularly at the long end of the Treasury yield curve.
That concern may appear justified. The 30-year Treasury yield now hovers around 5%, and any move higher could undermine the intended stimulus effect and risk triggering a crowding-out dynamic in capital markets.
At present, a combination of tariff uncertainty, fiscal policy ambiguity, and concerns over Treasury issuance volume are keeping yields elevated. But these same dynamics continue to create compelling opportunities in high quality taxable and tax-exempt fixed income.
So far, corporate credit fundamentals remain solid, with corporate bonds continuing to outperform. As always, credit selection will be key as investors focus on issuer resilience in the face of macro uncertainty.
From a municipal bond standpoint, the potential for spending cuts may introduce headline risk or rating pressure for certain state and local issuers. However, with taxable equivalent yields near the upper end of their 15-year range, we believe municipal bonds remain an attractive value proposition for long-term, high-tax-bracket investors.
Name:
Ozan Volkan
Title:Senior Portfolio Manager OIA Tax-Exempt Fixed Income
Name:
Leo Dierckman
Title:Senior Portfolio Manager OIA Taxable Fixed Income
Name:
Michael Richman, CFA
Title:Senior Portfolio Manager OIA Taxable Fixed Income
Disclosures
This piece is intended for informational purposes only. All information provided is subject to change. Investing in securities is speculative and entails risk. There can be no assurance that the investment objectives will be achieved or that an investment strategy will be successful Securities are offered through Oppenheimer & Co. Inc., a registered broker-dealer and affiliate of OAM. This material is not a recommendation as defined in Regulation Best Interest adopted by the Securities and Exchange Commission. It is provided to you after you have received Form CRS, Regulation Best Interest disclosure and other materials. Past performance does not guarantee future results. The risks associated with investing in fixed income include risks related to interest rate movements as the price of these securities will decrease as interests rates rise (interest rate risk and reinvestment risk), the risk of credit quality deterioration which is an issuer that will not be able to make principal and interest payments on time (credit or default risk), and liquidity risk (the risk of not being able to buy or sell investments quickly for a price that is close to the true underlying value of the asset). Average credit quality is calculated by considering the proportion of the value of each individual credit rating) lower of Moodys or S&P) and noting it as a percentage of the entire portfolio, thus producing the average credit quality. Adverse changes in economic conditions or developments regarding the issuer are more likely to cause price volatility for issuers of high yield debt than would be the case for issuers of higher grade debt securities. A credit rating is an assessment provided by a nationally recognized statistical rating organization (NRSRO) such as Standard & Poor or Moody's of the creditworthiness of the issuer with respect to debt obligations. Ratings are measured on a scale that generally ranges from AAA/AAA (highest, depending on the rating organization) to C or D (lowest, again, depending upon the rating organization). Quality Distribution is based on a weighted average of strategy accounts. Bond ratings are categorized by the lower of Moody's or S&P. For more information regarding bond ratings on municipal bonds, please visit www.moodys.com/ratings or www.spglobal.com/ratings.
* (Taxable Equivalent Yield = YTW adjusted for top Federal tax bracket + 3.8% surcharge for appropriate Munis). The views expressed herein are those of the authors as of the date indicated and may change without notice. They do not necessarily reflect the opinions of Oppenheimer & Co. Inc. or its affiliates and should not be construed as a firm recommendation or investment advice.
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