Muted, positive returns for fixed income in an eventful quarter

In Q2, falling oil prices and easing conflict in Iran initially pointed to lower yields, but a hawkish Fed leadership shift and resilient US growth kept Treasury rates moving higher instead.

That backdrop pressured high-quality bonds, while credit exposure helped returns as corporate earnings stayed strong and spreads remained tight. Municipal bonds also performed well, supported by attractive taxable-equivalent yields and heavy investor demand.

Looking ahead, AI-related capital spending and improving consumer demand could support growth in Q3, even as fiscal stimulus fades. The main risks are sticky inflation, policy uncertainty from the new Fed leadership, and the possibility that credit markets are already priced for too much good news.