Executive Summary
Equities, bonds and the dollar all retreated last week amid renewed focus on the U.S. budget deficit and rising debt. Fresh tariff threats were also a reminder that trade developments remain, as evidenced by the equity markets’ decline and recovery in response to the threat and “kick the can” headlines related to European tariffs.
Last week, the 10-year Treasury yield exceeded 4.5%, and the 30-year crossed the 5% mark, nearing the highest since 2007. These moves potentially send a warning signal that the bond market is starting to pay attention to the government’s debt trajectory and fiscal discipline. Rising borrowing needs may affect long-term Treasuries more than short-term bonds, steepening the yield curve, as investors require additional yield (a risk premium) to hold long-term debt.
When the 30-year Treasury yield climbed above 5%, the dollar weakened against major currencies, and equities pulled back amid renewed focus on the U.S. budget deficit and rising debt levels. Though the trigger (Moody’s downgrade) was new, the underlying concern about fiscal sustainability is not. The question now appears to be whether these developments mark a turning point for markets, or simply a temporary pause, and what signals the bond market is sending. Yields on long Japanese government bonds (JGBs) fell sharply after news reports that the country’s finance ministry might issue fewer of these bonds. The 30-year JGB yield fell sharply following the report, dropping 18.5bps to 2.85%. It had traded recently as high as 3.05%.
We believe the rise in bond yields is self-limiting to some extent, as higher yields attract more demand, slow economic activity and inflation, leading the Fed to reconsider rate cuts. It may trigger policy changes with lawmakers pulling back on some spending initiatives or adding offsets while deregulation of the financial services sector is pending.
Equities
The S&P 500 returned -2.6%. Late Friday of the previous week, Moody’s downgraded U.S. treasury debt ratings, driving up long-term yields with the 30-year note rising above 5%. The House passing a budget bill that showed rising deficits, along with further saber-rattling on trade negotiations with the E.U., also spooked markets. All sectors in the S&P500 had negative returns, with energy (-4.1%), technology (-3.4%), and real estate (-3.3%) the key laggards. EAFE markets returned +1.3% with gains across key geographies. EM markets returned -0.1%, with gains in China (+0.7%) offset by losses in Brazil (-1.6%).
From a valuation perspective, only U.S. large caps trade above +1 standard deviation based on historical forward P/E ratios with the S&P 500 at +1.7. The NASDAQ is at +0.9. For the next 12 months, EPS growth for S&P 500 is expected to be 6.9% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 13.9% (vs. 10.7% annualized over the last 20 years). Equities across market caps in the U.S. and in non-U.S. developed and emerging markets trade at or above their 20-year averages based on forward P/E ratios.
Fixed Income
Investment grade fixed income sectors had negative returns as yields rose at the long end of the curve. Municipals returned -0.3%, U.S. AGG returned -0.5% and U.S. IG returned -0.5%. HY bond returned -0.5% as spreads widened 25bps while bank loans returned +0.1%. EM debt returned -0.2% as the U.S. dollar fell 2.0%.
Rates
Rates rose at the long end of the curve based on Moody’s downgrade and amid concerns of continued long-term deficits. The recession-watch 3M-10Y spread widened 4bps to remain positive at +17. The 2Y-10Y spread widened 4bps to +52. Rates rose in the U.K, and Japan and fell slightly in the E.U. The BTP-Bund spread is at 1.02%. 5-year breakeven inflation expectations fell 1bp to 2.42% (vs. low of 1.88% on Sept 10); 10-year breakeven inflation expectations fell 1bp to 2.35% (vs. recent low of 2.03% on Sept 10); the 10Y real yield rose 5bps to 2.16%. The market now expects two cuts in 2025 vs the Fed’s guidance of two cuts. At year-end 2025, the market expects the Fed Funds rate to be 3.85% vs. the Fed’s guidance of 3.75%-4.00%.
Currencies/Commodities
The dollar index fell 2.0%. The commodities complex rose 0.4%, while energy prices fell 0.7% for the week. Brent prices fell 1.0% to $65/bbl. U.S. natural gas prices were flat, while European gas rose 5.4%.
Market monitors
Volatility rose for equities and for bonds (VIX = 22, MOVE = 101); the 10-year average for each is VIX=18, MOVE = 78. Market sentiment (at midweek) improved slightly from -9 to +1.
Weekly Commentary
Investment Commentary – May 27, 2025
Stuart Katz
Executive Summary
Equities, bonds and the dollar all retreated last week amid renewed focus on the U.S. budget deficit and rising debt. Fresh tariff threats were also a reminder that trade developments remain, as evidenced by the equity markets’ decline and recovery in response to the threat and “kick the can” headlines related to European tariffs.
Last week, the 10-year Treasury yield exceeded 4.5%, and the 30-year crossed the 5% mark, nearing the highest since 2007. These moves potentially send a warning signal that the bond market is starting to pay attention to the government’s debt trajectory and fiscal discipline. Rising borrowing needs may affect long-term Treasuries more than short-term bonds, steepening the yield curve, as investors require additional yield (a risk premium) to hold long-term debt.
When the 30-year Treasury yield climbed above 5%, the dollar weakened against major currencies, and equities pulled back amid renewed focus on the U.S. budget deficit and rising debt levels. Though the trigger (Moody’s downgrade) was new, the underlying concern about fiscal sustainability is not. The question now appears to be whether these developments mark a turning point for markets, or simply a temporary pause, and what signals the bond market is sending. Yields on long Japanese government bonds (JGBs) fell sharply after news reports that the country’s finance ministry might issue fewer of these bonds. The 30-year JGB yield fell sharply following the report, dropping 18.5bps to 2.85%. It had traded recently as high as 3.05%.
We believe the rise in bond yields is self-limiting to some extent, as higher yields attract more demand, slow economic activity and inflation, leading the Fed to reconsider rate cuts. It may trigger policy changes with lawmakers pulling back on some spending initiatives or adding offsets while deregulation of the financial services sector is pending.
Equities
The S&P 500 returned -2.6%. Late Friday of the previous week, Moody’s downgraded U.S. treasury debt ratings, driving up long-term yields with the 30-year note rising above 5%. The House passing a budget bill that showed rising deficits, along with further saber-rattling on trade negotiations with the E.U., also spooked markets. All sectors in the S&P500 had negative returns, with energy (-4.1%), technology (-3.4%), and real estate (-3.3%) the key laggards. EAFE markets returned +1.3% with gains across key geographies. EM markets returned -0.1%, with gains in China (+0.7%) offset by losses in Brazil (-1.6%).
From a valuation perspective, only U.S. large caps trade above +1 standard deviation based on historical forward P/E ratios with the S&P 500 at +1.7. The NASDAQ is at +0.9. For the next 12 months, EPS growth for S&P 500 is expected to be 6.9% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 13.9% (vs. 10.7% annualized over the last 20 years). Equities across market caps in the U.S. and in non-U.S. developed and emerging markets trade at or above their 20-year averages based on forward P/E ratios.
Fixed Income
Investment grade fixed income sectors had negative returns as yields rose at the long end of the curve. Municipals returned -0.3%, U.S. AGG returned -0.5% and U.S. IG returned -0.5%. HY bond returned -0.5% as spreads widened 25bps while bank loans returned +0.1%. EM debt returned -0.2% as the U.S. dollar fell 2.0%.
Rates
Rates rose at the long end of the curve based on Moody’s downgrade and amid concerns of continued long-term deficits. The recession-watch 3M-10Y spread widened 4bps to remain positive at +17. The 2Y-10Y spread widened 4bps to +52. Rates rose in the U.K, and Japan and fell slightly in the E.U. The BTP-Bund spread is at 1.02%. 5-year breakeven inflation expectations fell 1bp to 2.42% (vs. low of 1.88% on Sept 10); 10-year breakeven inflation expectations fell 1bp to 2.35% (vs. recent low of 2.03% on Sept 10); the 10Y real yield rose 5bps to 2.16%. The market now expects two cuts in 2025 vs the Fed’s guidance of two cuts. At year-end 2025, the market expects the Fed Funds rate to be 3.85% vs. the Fed’s guidance of 3.75%-4.00%.
Currencies/Commodities
The dollar index fell 2.0%. The commodities complex rose 0.4%, while energy prices fell 0.7% for the week. Brent prices fell 1.0% to $65/bbl. U.S. natural gas prices were flat, while European gas rose 5.4%.
Market monitors
Volatility rose for equities and for bonds (VIX = 22, MOVE = 101); the 10-year average for each is VIX=18, MOVE = 78. Market sentiment (at midweek) improved slightly from -9 to +1.
Disclosure and Source
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