U.S. Bonds Post Broad Gains YTD, But Second-Half Pressures Building — Evening Brief – 06.20.25
The U.S. bond market is posting solid, broad-based gains heading into midyear, though several macro risks are beginning to emerge for the second half of 2025. All major fixed income sectors remain positive year-to-date, with intermediate Treasuries leading the pack.
The iShares 7-10 Year Treasury Bond ETF (IEF) has returned 3.9% year-to-date, narrowly outperforming intermediate corporates (VCIT), while the broader U.S. investment-grade aggregate benchmark (BND) is up 2.9%. Even long-duration Treasuries, represented by the iShares 20+ Year Treasury Bond ETF (TLT), have posted a modest 1% gain this year, despite ongoing concerns about duration sensitivity and supply pressures.
Looking ahead, several catalysts could pressure the bond market. The most immediate concern is energy-driven inflation risk. Recent tariff announcements and escalating Middle East tensions have driven oil prices sharply higher. Sustained energy price increases would feed into higher headline inflation, potentially forcing the Federal Reserve to delay rate cuts or maintain a more hawkish posture. The Fed’s latest economic projections already reflect a stagflationary bias, highlighting the risk of slower growth alongside stubbornly high inflation—a combination that poses growing challenges for fixed income.
At the same time, fiscal concerns are gaining renewed focus. This week, the Congressional Budget Office (CBO) raised its projections, forecasting $441 billion in additional debt servicing costs, with the Senate’s pending spending bill potentially adding $2.4 trillion to the federal deficit over the next decade.
Rising issuance needs will continue to weigh Treasury supply-demand dynamics, particularly if foreign sponsorship continues to weaken. Loomis Sayles’ Matt Eagan notes that persistent deficits, political gridlock, and limited appetite for tax reform leave inflation as a de facto “fiscal release valve” — a dynamic that could further pressure both the bond market and currency stability, not only in the U.S. but across developed markets facing similar structural challenges.
In short, while year-to-date fixed income performance remains firmly positive, the setup for the second half is becoming more asymmetric. Supply pressures, inflation uncertainty, and policy constraints suggest that duration exposure will require a more defensive, selective approach in the coming months, with heightened attention to auction dynamics, foreign participation, and long-end curve behavior as issuance accelerates.