Displaying items by tag: bonds

U.S. Treasury yields plummeted, particularly on short-term notes, after July’s jobs report came in significantly weaker than expected, reigniting investor expectations for an imminent Federal Reserve rate cut. 

The two-year yield dropped 25 basis points to 3.71%, its steepest one-day fall in a year, as traders priced in an 80% chance of a rate cut at the Fed’s September meeting. The labor data showed just 73,000 jobs added in July, well below forecasts, and revisions to prior months brought the three-month hiring average to a pandemic-era low of 35,000. 

The market’s reaction signaled a dramatic pivot in sentiment, further fueled by political pressure from President Trump and dovish dissent from two Fed governors. Treasury futures volumes surged as traders abandoned flattening yield curve bets, and CreditSights analysts now anticipate a 50-basis-point rate cut in September, with more to follow by year-end. 

Finsum: The Fed can afford aggressive easing without stoking inflation, setting the stage for a bold monetary policy shift.

So far in 2025, investment-grade bonds have generally delivered modest gains, but municipal bonds have bucked the trend with disappointing performance. The iShares Core U.S. Aggregate Bond ETF (AGG) returned 2.85% through mid-June, while the iShares National Muni Bond ETF (MUB) declined by 1.29%, despite their similar credit quality and low fees. 

One key difference lies in liquidity: municipal bonds are often held long-term, making them harder to trade, with wide bid-ask spreads that erode value during redemptions. Outflows from MUB and uncertainty around tax policy, especially the fate of the 2017 tax cuts, may also be pressuring muni prices. 

For investors in high tax brackets, limited allocations to diversified, low-cost muni funds may still be warranted, but caution is advised, and exposure should generally stay under 20% of fixed income holdings.

Finsum: Structural issues, like the possibility of reduced federal funding for states and large unfunded liabilities, further cloud the muni bond outlook.

As expectations for interest rate cuts build, emerging market (EM) debt is drawing increasing attention from investors. Lower U.S. rates typically weaken the dollar, making EM currencies more attractive and boosting returns on dollar-denominated EM bonds. 

This favorable backdrop has already spurred strong demand, with EM bond issuance in Central and Eastern Europe, the Middle East, and Africa reaching $190 billion in the first half of 2025, on pace to break historical records. 

The Vanguard Emerging Markets Government Bond ETF (VWOB) offers investors a low-cost, diversified way to access this space, boasting a 30-day SEC yield of 5.66% and nearly 7% YTD return. As rate cut bets intensify into September, VWOB is positioned to benefit from both income and potential price appreciation. 

Finsum: For investors seeking EM exposure without the complexities of individual bond selection, ETFs offer compelling options

Debentures are long-term debt instruments that allow companies and governments to raise capital without pledging specific assets as collateral. These unsecured bonds appeal to investors seeking portfolio diversification and fixed income, though they carry risks tied to the issuer’s creditworthiness. 

While government-issued debentures are generally low-risk due to sovereign backing, corporate debentures rely on the company’s financial health and reputation, making credit ratings an essential consideration. 

There are various types: convertible debentures can later be exchanged for company stock, while nonconvertible ones cannot but typically offer higher interest rates; similarly, secured debentures are backed by company assets, whereas unsecured ones are not, increasing the investment risk but potentially offering higher yields. 

Finsum: While they provide regular income and reduced exposure to market volatility, investors must weigh those benefits against interest rate sensitivity and potential default risk.

As of June 2025, the Federal Reserve has maintained its key interest rate, creating a rare window for investors to take advantage of elevated yields at the short end of the bond curve. 

With short-term yields currently exceeding those of intermediate maturities, ultrashort bond funds have emerged as an efficient way to earn income without assuming significant duration risk. These funds, which typically hold maturities under one year, offer a balance of liquidity, low volatility, and competitive returns. Among the top active strategies is Pimco’s Short-Term fund, which combines nimble credit allocation with disciplined risk management, avoiding complex securities and leaning on deep market expertise. 

For investors seeking tax-efficient income, Vanguard’s Ultra Short-Term Tax-Exempt fund delivers high-quality municipal bond exposure with an ultrashort duration, making it a smart pick in rising rate environments. 

Finsum: These strategies give investors a way to capture attractive yields while staying agile amid ongoing rate uncertainty.