First Half of 2025: Bond Market Update

Safety First

Safety is emphasized in certain activities because it helps prevent accidents and injuries when things get volatile – think wearing a seatbelt in the car or a helmet while biking. “Safety first” means taking the time to make sure you’re protected before doing anything else, especially engaging in activities that can become tumultuous.

High-Quality Bond Ladders Add Layers of Protection

When tumultuous volatility gripped the stock market in early April this year, the S&P 500 benchmark fell nearly 20% from its highs and lost trillions of dollars in market value. The Wall Street Journal called it a “brutal dip” and reported that, “Markets have experienced historic swings in the days following President Trump’s announcement of a sweeping tariff plan.” On the evening of April 8, Reuters even commented that the dollar value decrease was “the deepest four-day loss” since the S&P 500 was created. Yet, amid this striking volatility in stocks, high-quality bonds held their value and had even provided positive returns for the year on that evening of April 8. Bond investors had long since fastened their seatbelt and donned their helmets.

When you know you’re safe, it is easier to enjoy a particular activity. It’s the same for investing. A high-quality bond ladder can become the seatbelt and helmet for your portfolio – it can put your mind at ease during volatile times like we experienced earlier this year.

High-quality bonds issued by financially strong entities with a low risk of default tend to maintain value – or even appreciate – when stocks decline. Their predictable interest payments and lower price fluctuations make them a reliable income source and a buffer against losses in riskier assets. By ensuring that high-quality bonds are a part of your portfolio, the inevitable volatility from stocks becomes less of a worry. Rest assured, your Fixed Income team at Baird Trust has this “safety first” mentality top of mind.

Bond Ladder Beats T-Bills

Recently, some have questioned why investors would own bonds when money market funds and Treasury bills are yielding above 4% – a level which is currently very similar to many investment-grade bonds. We hear, “Why even take the risk of intermediate bonds?” Well, the first half of 2025 was a very good period for bond ladders – and if you were sitting in money markets or Treasury bills, you would have missed it.

Total Returns: Bond Ladder Versus Treasury Bills*

	1st half 2025	So far this century
Bond Ladder**	4.13%	3.83%
Treasury Bills***	2.12%	1.89%

*Data from Bloomberg LLC; century returns are average annualized
** Bond Ladder represented by the Bloomberg Intermediate Gov/Credit Index
*** Treasury Bills represented by the ICE BofA 0-3 Mth T-Bill Index

As shown in the table below, high-quality intermediate bond strategies have outperformed Treasury bills over the long-term by roughly 2% per year.

We understand that it can be tempting to sit in Treasury bills for short periods of time when overnight yield levels are similar to bond yields. But, like stocks, if you miss the very best days, your long-term performance will suffer.

Triple-A Is No Longer

The downgrade of the U.S. Treasury’s credit rating by Moody’s from Aaa to Aa1 in May 2025 led to a short-term spike in bond market volatility. Following the announcement, the 30-year Treasury yield jumped above 5%, and the 10-year yield climbed above 4.5%.

The downgrade was driven by concerns over the growing federal deficit, rising interest costs and a lack of fiscal discipline. While the move was largely symbolic – bringing Moody’s in line with earlier downgrades by S&P and Fitch – it still triggered a knee-jerk reaction in the markets.

In summary, the Moody’s downgrade in May was a reminder of the large debt levels and budget deficits in the United States government – and we did see a temporary increase in bond volatility, especially in longer maturities. Our “safety first” approach certainly means we will be paying close attention to the Treasury market in months and years ahead. Although fiscal conditions may worsen further in the U.S., and the ability to attract foreign investment may fade at the edges, our view presently is that the long-standing “risk-free” perception of U.S. Treasury bills, notes and bonds will remain in place over the long-term.