Between a Rock And a Hard Place: Q1 2025
Investment Grade Bonds Search for Firmer Footing
Key Points:
- Despite volatility, stay the course on yield and income opportunities.
- Picking value during market dislocation can benefit long-term investors.
- Credit is resilient, but uncertain economic winds warrant caution in bond selection.
Investment-grade (IG) fixed-income returns were mixed to end the first quarter. While all pockets of the financial market confronted elevated volatility, uneven performance developed toward the final weeks of the first quarter.
The U.S. Treasury Index delivered solid performance, rewarding investors with a 2.92% total return versus a loss of 22 basis points (bps) for IG municipal bonds and 2.31% for IG corporate bonds, per Bloomberg indexes. Front and center was the uncertainty over U.S. trade policy, particularly the impact of tariffs, as well as escalating geopolitical and economic risks. These events pushed inflation expectations up and growth down and pulled consumption forward as businesses and consumers dashed to get ahead of implementation. The results were lower rates and wider credit spreads. The bellwether 10-year U.S. Treasury bond declined a cumulative 37 bps during the first quarter, reflecting more periods of risk-off investor sentiment. While the Federal Reserve left its overnight lending rate unchanged at its March meeting, it faces potentially difficult policy choices ahead with a tug-of-war between mitigating rising prices and staving off disruptions to employment. That being said, easing rates may not cure imbalances, but time perhaps will.
Chart 1: Investment Grade Corporate Bond Spreads
Source: Bloomberg, as of March 31, 2025. Past performance is no guarantee of future results.
A key observation during the first quarter was the change in valuations and risk pricing across IG bonds. Credit spreads on the Bloomberg U.S. Corporate Investment Grade Index widened between +14 bps and +94 bps, hitting its highest level since August 2024. While close monitoring of corporate fundamentals is warranted as economic headwinds swirl, IG corporate borrowers should continue benefiting from mostly healthy balance sheets, stable leverage and favorable cash flow generation. The magnitude and duration of policy shifts associated with trade and economic factors could further weigh on credit spreads and pricing. In municipals, the ratio of the 10-year AAA benchmark municipal bond versus a comparable Treasury bond is a key valuation metric. This metric increased meaningfully in the final weeks of the first quarter, as Treasury rates held steady and municipal yields rose (i.e., municipals underperformed), making municipal bonds more attractive at levels not seen in at least two years. Valuations coupled with mostly durable credit conditions, albeit normalizing for issuers given policy shifts, offer compelling value for market investors and could continue as volatility increases in the near term.
Chart 2: 5-yr and 10-yr Municipal-to-Treasury Ratios
(%)
Source: Bloomberg, as of March 31, 2025. Past performance is no guarantee of future results.
One theme that fixed-income investors have continually embraced is income. At quarter-end, the yield to worst of IG municipal bonds and IG corporate bonds, per Bloomberg, was 3.85% and 5.15%, respectively. Attractive yields may provide good cash flow and act as a buffer to rate volatility. Moreover, higher yields benefit forward-return potential. As we progress through the next few months, staying engaged in the markets when dislocation surfaces can add value to long-term investors, but adhering to sound active management and security selection will be crucial to navigating economic uncertainty.
Important Information
The views expressed represent the opinions of City National Rochdale, LLC (CNR) which are subject to change and are not intended as a forecast or guarantee of future results. Stated information is provided for informational purposes only, and should not be perceived as personalized investment, financial, legal or tax advice or a recommendation for any security. It is derived from proprietary and non-proprietary sources which have not been independently verified for accuracy or completeness. While CNR believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations,estimates, projections, and other forward-looking statements are based on available information and management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions which may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Diversification may not protect against market risk or loss. Past performance is no guarantee of future performance.
© 2025 City National Bank. All rights reserved.
Index Definitions
S&P 500 Index: The S&P 500 Index, or Standard & Poor’s 500 Index, is a market-capitalization-weighted index of 500 leading publicly traded companies in the US It is not an exact list of the top 500 US companies by market cap because there are other criteria that the index includes.
Bloomberg Municipal Bond Index: The Bloomberg US Municipal Bond Index measures the performance of investment grade, US dollar-denominated, long-term tax-exempt bonds.
Bloomberg Municipal High Yield Bond Index: The Bloomberg Municipal High Yield Bond Index measures the performance of non-investment grade, US dollar-denominated, and non-rated, tax-exempt bonds.
Bloomberg Investment Grade Index: The Bloomberg US Investment Grade Corporate Bond Index measures the performance of investment grade, corporate, fixed-rate bonds with maturities of one year or more.
The Bloomberg Magnificent 7 Total Return Index: Bloomberg Magnificent 7 Total Return Index is an equal-dollar weighted equity benchmark consisting of a fixed basket of 7 widely-traded companies classified in the United States and representing the Communications, Consumer Discretionary and Technology sectors as defined by Bloomberg Industry Classification System (BICS).
Nasdaq is a global electronic marketplace for buying and selling securities. Its name was originally an acronym for the National Association of Securities Dealers Automated Quotations.
The Dow Jones Industrial Average (DJIA) tracks thirty of America’s biggest and most established companies, acting like a quick temperature check of the U.S. economy.
The MSCI USA Large Cap Index is designed to measure the performance of the large cap segments of the US market. The index covers approximately 70% of the free float-adjusted market capitalization in the US.
The Bloomberg Investment Grade Corporate Bond Spreads refer to the spreads between investment grade, fixed-rate, taxable corporate bonds.
BVAL Municipal AAA Benchmark is a municipal bond benchmark. It provides a 5% coupon benchmark yield curve for high-quality US municipal bonds with an average rating of “AAA” from Moody’s and S&P.
The 10-year BVAL AAA municipal treasury index compares the yield on a AAA rated municipal bond to that of a Treasury before factoring in the effect of taxes.
The Morningstar LSTA US Leveraged Loan 100 Index is designed to measure the performance of the 100 largest facilities in the US leveraged loan market.
The ICE BofA Diversified High Yield US Emerging Markets Corporate Plus Index tracks the performance of US dollar denominated below investment grade emerging markets non-sovereign debt publicly issued in the major domestic and eurobond markets.
The Palmer Square CLO Senior Debt Index is a rules-based observable pricing and total return index for CLO debt for sale in the United States, rated at the time of issuance as AAA or AA (or an equivalent rating).
The Russell 3000 is a broad equity index composed of the 3,000 largest U.S. listed stocks, representing more than 95% of the investable American stock market.
The MSCI ACWI ex USA Index captures large and mid cap representation across Developed Markets (DM) countries (excluding the US) and Emerging Markets (EM) countries. The index covers approximately 85% of the global equity opportunity set outside the US.
Definitions
The “core” Personal Consumption Expenditures (PCE) price index is defined as prices excluding food and energy prices. The core PCE price index measures the prices paid by consumers for goods and services without the volatility caused by movements in food and energy prices to reveal underlying inflation.
A leveraged loan is a type of loan that is extended to companies or individuals that already have considerable amounts of debt or poor credit history.
Yield to worse (YTW) is the lowest potential yield that an issuer can pay on a bond without defaulting.
The Magnificent 7 refers to a group of major tech companies with stock growth that far outpaced the high-performing S&P 500 in recent years. Coined in 2023, the group consists of Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla.
© 2025 City National Bank. All rights reserved.
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