Mike Sanders, Head of Fixed Income, Madison Investments
Mike Wachter, Co-Head of Reinhart Fixed Income
Bill Ford, Co-Head of Reinhart Fixed Income
Trade Talk
With the NFL Draft coming up in our home state of Wisconsin, we are reminded how a few high-stakes decisions can change the course of a season. Will drafting a player alter the fate of a team? Will a blockbuster trade set an organization on the path for perennial success? Or, perhaps, will the commissioner step in and change the rules of the game altogether?
While fans speculate on their teams’ picks, investors are focused on another game: Trade War 2.0. Businesses, investors, and consumers alike are trying to figure out the new “rules of the game” as it relates to the changing global trade environment. It’s not a perfect analogy, but one thing is clear: the outcome of the Trump administration’s aggressive trade posture is reshaping the global order, and the implications for fixed income markets are significant.
Redefining Risk: Bonds Regain Their Hedge Role Despite New Risk Factors
Fixed income markets brushed off the volatility in the equity markets of late February and into March. Investors with balanced portfolios were reminded of the power of diversification, as bonds served as a hedge to equities—something they couldn’t do with much success in the low interest rate environment in 2022. While the S&P 500 was down 4.3% in the first quarter of 2025, the broad market Bloomberg Aggregate Bond Index was up 2.8%.
Yields peaked in mid-January before declining sharply into quarter-end, as concerns over global growth and trade tensions drove investors toward safer assets.
The script flipped on April 2, when a sweeping new tariff policy disrupted the market’s momentum. Investors started factoring in a higher likelihood of economic pain as a result of the harsh trade policies. Credit spreads began to widen, reflecting economic uncertainty, and investors began pricing in more cuts to the federal funds rate in anticipation of a weakening labor market.
Spread volatility may provide opportunities to position high quality corporate bonds at reasonable valuations. Our focus remains on issuers with strong financial profiles whose industries are less sensitive to economic conditions. Sources: Madison, Bloomberg, ICE Global Indices, S&P Capital IQ
After the tariffs were paused for 90 days (excluding China), risk assets rallied exuberantly and the yield curve again repriced, with interest rates moving higher. Market movements in both directions indicate concerns about the Trump administration’s trade policy end goal and its impact on the U.S. economy and inflation. While the 90-day pause was a welcome development, we will be watching for how much damage has been and will be done to the economy, and whether it will move inflation or employment far enough from the Fed’s goals to force policy action.
Though corporate bond spreads widened during the quarter, OAS valuations remain near or below the 20th percentile rank, meaning spreads are higher roughly 80% of the time versus current levels. Structured products, including mortgage- and asset-backed securities, appear to offer better relative value. Sources: Madison, Bloomberg, ICE Global Indices
The Fed: Data vs. Sentiment
The Fed’s next move will likely depend on which side of its dual mandate—price stability or full employment—drifts further from its target.
As of this writing, the labor market remains on solid ground, with unemployment steady around 4%. Inflation remains elevated at about 2.5%, but much closer to the Fed’s target of 2% than where it had been in recent years. Consumer finances are in good condition, though evidence of depleted savings, increased credit use, and an uptick in delinquencies are worth monitoring. Meanwhile, survey data—such as small business sentiment and consumer price expectations—suggests tougher times may lie ahead.
Private employers continue to add jobs, albeit at a slower pace. The 4.2% unemployment rate reported for March is likely to rise in the near-term as companies prepare for a potential period of slower growth. Sources: Madison, Bloomberg
We believe the Fed will follow the hard data when deciding on its policy. The Fed appears biased toward easing, with any trade-induced price increases likely to be met with continued patience. A rapidly-deteriorating labor market would give the Fed the green light to resume cutting rates despite any uptick in inflation.
Outlook and Positioning
If it turns out that peak trade uncertainty is behind us, interest rates and credit spreads should begin to reflect economic and business fundamentals. That’s not to say the economy is out of the woods yet. If consumers and businesses begin to reduce or delay investments, hiring, and purchases in response to higher cross-border trade costs, it could tip the U.S. into recession—which would require a different playbook for investors and policymakers.
In the meantime, fixed income investors are presented with advantageous risk/return prospects going forward. High quality bonds once again provide the core benefits they did before the ultra-low interest rate era that followed the great financial crisis. Higher yields across the yield curve should provide (1) a more consistent source of income, (2) potential for principal preservation, and (3) risk reduction in a diversified portfolio.
We believe investors must be active and opportunistic in how they approach this market environment. Investors should remain flexible and prepared to adjust portfolios as opportunities arise, knowing that there are risks out there that are difficult to model. In portfolio management, having a margin of error in decision-making will help to navigate the uncertainty. We continuously evaluate whether we’re being adequately compensated for risk—and always in the context of evolving macro conditions.
The months ahead will likely remain turbulent, but we look forward to increased opportunities in fixed income markets.