GW&K Taxable Monthly Update January 2025

TAXABLE BOND
MARKET REVIEW & OUTLOOK

Taxable Monthly Update | January 2025

The US economy continued to display strong momentum heading into the new year, underpinned by robust consumer spending and a solid labor market.
Key consumer price data signaled steady inflationary pressures, helping to keep interest rates in check across the yield curve.
The Fed kept rates steady at the January Federal Open Market Committee (FOMC) meeting, maintaining a target range of 4.25% – 4.50%. Fed Chair Jerome Powell expressed patience on further rate cuts, as the FOMC reassesses a strong labor market and somewhat elevated inflation.

TAXABLE BOND MARKET UPDATE & OUTLOOK

The Bloomberg US Aggregate Bond Index posted a positive return, aided by benign inflation prints and the Fed hitting the pause button.
Fiscal policy shifts from the new administration around trade and immigration have been a major focus of the market.
The yield curve halted the aggressive steepening momentum seen in Q4, as10-year and 2-year Treasury yields moved essentially in tandem.
The Fed and the futures market are pointing to a target federal funds rate of 3.9% at the end of 2025 — approximately 100 bps higher than expectations just a few months ago. The longer-term outlook for the “neutral” rate remains a widely debated target.
Strong underlying fundamentals and positive technicals drove high yield spreads to retest last year’s tight levels. A strong macroeconomic backdrop and a relentless hunt for yield drove lower- quality outperformance. Investment grade spreads were essentially unchanged, as a strong primary calendar kept spreads from compressing further from their already tightest level in decades.
Agency mortgage-backed securities marginally outperformed similar duration Treasuries. The sector continued to benefit from lower interest-rate volatility, attractive valuations, and diminished seasonal supply. Investors remain on alert for long-held government-sponsored enterprises like Fannie Mae and Freddie Mac becoming private.
Asset-backed securities (ABS) slightly underperformed on elevated new-issue supply levels. ABS remains a high-quality sector that will carry well in a higher-for-longer interest-rate environment.
With the Fed expressing no immediate urgency to cut rates, and inflation still running above the Fed’s 2% target, Treasury yields are likely to remain elevated. Despite tight valuations, the corporate bond sector should continue to be supported by attractive yields and strong fundamentals. The securitized sector provides a very attractive risk-adjusted yield, in a lower-rate volatility environment.

SECTOR ALLOCATION	POSITIONING
DURATION & YIELD CURVE	We are neutral duration. The Fed’s policy is discounted, leading us to believe we have likely seen the peak in rates. The central bank remains skewed toward an easing path, and this backdrop should help anchor the short-to-intermediate part of the yield curve. Investor appetite for absolute yield and questions around the new administration’s policy shifts should continue to cap yields in longer maturities.
TREASURIES	We favor spread product over Treasuries in this attractive carry environment. Rates remain attractive relative to post-global financial crisis (GFC) history. Further significant weakness is likely to be capped by investors seeking compelling absolute yields.
GOVERNMENT RELATED	We are overweight in taxable municipal bonds given the strong fundamentals and recession-resistant characteristics offered by the asset class.
CORPORATE BONDS	We continue to be overweight in the corporate bond sector. The ongoing strength of the US economy, gradually moderating inflation, and some of the highest yields seen in the bond market post-GFC offer a compelling setup for risk assets to be emphasized for the positive carry.
SECURITIZED	We are overweight the securitized sector. Low refinance activity and slow seasonal housing turnover have led to benign supply, offering a tailwind to the sector. Spreads remain above historical levels, and the sector should benefit from a positive technical environment going forward. Asset-backed securities remain a good source of income in low-duration, high-quality bonds.

Disclosures

This represents the views and opinions of GW&K Investment Management and does not constitute investment advice, nor should it be considered predictive of any future market performance. Data is from what we believe to be reliable sources, but it cannot be guaranteed. Opinions expressed are subject to change. Past performance is not indicative of future results.

Indexes are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in an index. Index data has been obtained from third-party data providers that GW&K believes to be reliable, but GW&K does not guarantee its accuracy, completeness or timeliness. Third-party data providers make no warranties or representations relating to the accuracy, completeness or timeliness of the data they provide and are not liable for any damages relating to this data. The third-party data may not be further redistributed or used without the relevant third-party’s consent. Sources for index data include: Bloomberg, FactSet, ICE, FTSE Russell, MSCI and Standard & Poor’s.

Perspectives