Macro Market Trends: Second quarter 2025

In his commentary, Western Asset CIO Michael Buchanan addresses the significant impact of rising public debt and fiscal policies on bond market volatility. Public debt has reached historical highs relative to output in many countries, raising concerns about the sustainability of government debt burdens and the potential for higher government bond yields, particularly in longer maturities, which could increase the cost of servicing debt. This situation is particularly pronounced in countries with substantial debt levels like the US, UK, and France.

Buchanan highlights that these concerns have contributed to increased volatility in government bonds, as investors question the sustainability of fiscal policies and the global demand for US Treasuries and other major government bonds by international investors. Over short periods, some investors may attempt to enforce fiscal discipline on governments they view as excessively expanding their borrowing. However, in the long term, factors such as inflation trends, economic growth, and central bank policies are expected to be the primary influences on developed market bond yields.

The commentary also considers the potential impact of higher tariffs on prices, which could obscure inflation and monetary policy outlooks. Despite uncertainties regarding the scale and persistence of these tariffs and the responses from policymakers, Buchanan anticipates a gradual slowing of inflation towards central bank targets, which could enable further rate cuts if economic conditions deteriorate. These macroeconomic fundamentals are expected to support bond market valuations, despite ongoing and substantial government borrowing needs.