The early-April announcement of a broad new round of tariffs against virtually all U.S. trading partners—followed by a pause for many of them—has triggered a tidal shift in the global economy. Uncertainty created by tariff negotiations, as well as burgeoning federal debt levels and other ongoing concerns, has far-reaching economic implications, leading us to reassess our 2025 outlook.
Key takeaways
Performance recap
Higher-quality bonds have outperformed so far this year as Treasury yields broadly declined and credit spreads widened. Tariff policy vacillation and weaker consumer sentiment data sparked fears of an economic growth slowdown. Positive bond returns helped cushion the volatility in U.S. stocks.
The big picture
The implementation of higher-than-expected tariffs in the U.S. will have substantial economic impact if they are maintained. Consequently, we revised our growth and labor market forecasts down and increased our outlook for inflation. While the likelihood of a recession has risen, the underlying economic fundamentals still show signs of strength. Inflation pressures could limit the Federal Reserve's policy options.
Our approach
Before the tariff announcements, we trimmed credit risk and moved up in quality. We remain optimistic about interest rates, favoring intermediate maturities as a hedge against our credit exposure. Credit valuations have improved, but not sufficiently to offset the increased uncertainty. We are overweight sectors that are more resilient to growth and policy risks. In municipal bonds, we anticipate strong flows into the summer months and see significant value in high-quality bonds at the long end of the curve.
Notes
- All investing is subject to risk, including the possible loss of the money you invest.
- Investments in bonds are subject to interest rate, credit, and inflation risk.
- Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund’s trading or through your own redemption of shares. For some investors, a portion of the fund’s income may be subject to state and local taxes, as well as the federal Alternative Minimum Tax.