Q2 highlights from the fixed income markets:
- Fixed income returns were strong in the quarter, driven by tighter spreads on both investment grade (IG) and high yield (HY) corporate bonds.
- The Bloomberg U.S. Aggregate Index (the Agg) returned 1.21% for the quarter, with every sub-sector posting positive absolute and excess returns. Year-to-date, the Agg is up over 4%, marking the best first-half performance since 2020.
- The Treasury yield curve steepened, as yields fell on the short end and rose on the long end.
- Corporate bond spreads tightened in every sector across both the IG and HY corporate spaces. In IG, the strongest sector performance came from the communications sector, while in HY the top sectors were utilities, consumer non-cyclicals and transportation.
- The high yield default rate is flat year-to-date after rising slightly in the quarter.
Read on for more details and analysis.
Market Summary
The second quarter was generally risk-on, as high yield was the strongest broad fixed income sector.
YIELDS & RETURNS (%) 1
| Duration (years) | Yield | Q2 Return | YTD Return | |
|---|---|---|---|---|
| Treasuries | 5.91 | 4.03 | 0.85 | 3.79 |
| Investment Grade Corporates | 6.94 | 4.99 | 1.82 | 4.17 |
| High Yield Corporates | 3.20 | 7.06 | 3.53 | 4.57 |
| Municipal Bonds | 6.69 | 3.96 | -0.12 | -0.35 |
U.S. Treasury Market
The Treasury yield curve steepened in the quarter, as yields on shorter Treasuries declined while longer yields increased.
TREASURY YIELDS (%) 1
| Q2 Change | Year-to-Date Change | 2025-06-30 | 2025-05-31 | 2025-04-30 | 2025-03-31 | |
|---|---|---|---|---|---|---|
| 90-Day T-Bills | -0.01 | -0.03 | 4.29 | 4.34 | 4.29 | 4.30 |
| 2-year Treasury | -0.18 | -0.53 | 3.72 | 3.89 | 3.59 | 3.90 |
| 5-year Treasury | -0.17 | -0.60 | 3.79 | 3.95 | 3.71 | 3.96 |
| 10-year Treasury | 0.02 | -0.35 | 4.23 | 4.39 | 4.15 | 4.21 |
| 30-year Treasury | 0.20 | 0.00 | 4.78 | 4.91 | 4.69 | 4.58 |
Returns were strong on short and intermediate Treasuries, and weaker further out the curve.
TREASURY RETURNS (%) 1
| Duration (years) | Q2 Return | YTD Return | |
|---|---|---|---|
| 90-Day T-Bills | 0.23 | 1.05 | 2.10 |
| 2-year Treasury | 1.94 | 1.12 | 2.73 |
| 5-year Treasury | 4.59 | 1.72 | 4.77 |
| 10-year Treasury | 8.12 | 1.04 | 5.08 |
| 30-year Treasury | 16.12 | -2.08 | 2.11 |
| U.S. Treasury TIPS | 6.52 | 0.48 | 4.67 |
Broad Investment Grade
The Agg had a good quarter, with every sub-category posting positive absolute and excess (relative to Treasuries) returns. The strongest absolute returns came from intermediate corporate bonds, while long corporates had the best excess returns.
INVESTMENT GRADE INDEX & SECTOR RETURNS (%) 1
| Duration (years) | Yield | Q2 Return | Duration adj. vs. Treasuries | YTD Return | Duration adj. vs. Treasuries | |
|---|---|---|---|---|---|---|
| U.S. Aggregate | 6.08 | 4.51 | 1.21 | 0.33 | 4.02 | 0.10 |
| Treasuries | 5.91 | 4.03 | 0.85 | 0.00 | 3.79 | 0.00 |
| Agencies | 3.67 | 4.23 | 1.30 | 0.12 | 3.44 | 0.12 |
| Mortgage-Backed Securities | 5.85 | 4.93 | 1.14 | 0.17 | 4.23 | 0.10 |
| Asset-Backed Securities | 2.66 | 4.41 | 1.38 | 0.27 | 2.93 | -0.02 |
| Intermediate Corporates | 4.18 | 4.66 | 2.12 | 0.69 | 4.45 | 0.41 |
| Long Corporates | 12.83 | 5.71 | 1.23 | 1.79 | 3.64 | -0.14 |
Spreads on IG bonds tightened across all maturity buckets in the quarter. Current-coupon MBS spreads also tightened.
INVESTMENT GRADE SPREADS (basis points) 1
| Q2 Change | Year-to-Date Change | 2025-06-30 | 2024-05-31 | 2025-04-30 | 2025-03-31 | |
|---|---|---|---|---|---|---|
| 1-3 Yr Corporates | -6 | 0 | 52 | 57 | 73 | 58 |
| Intermediate Corporates | -8 | 4 | 75 | 80 | 98 | 83 |
| Long Corporates | -16 | 2 | 100 | 106 | 123 | 116 |
| MBS Current Coupon Spread | -5 | 0 | 125 | 134 | 139 | 130 |
In the IG corporate bond space, lower-rated corporates outperformed higher-rated categories.
INVESTMENT GRADE CORPORATE CREDIT QUALITY RETURNS (%) 1
| Duration (years) | Yield | Q2 Return | Duration adj. vs. Treasuries | YTD Return | Duration adj. vs. Treasuries | |
|---|---|---|---|---|---|---|
| AAA | 9.98 | 4.75 | 0.84 | 0.91 | 3.55 | -0.16 |
| AA | 7.86 | 4.70 | 1.33 | 0.86 | 3.79 | 0.07 |
| A | 6.91 | 4.86 | 1.80 | 1.03 | 4.22 | 0.28 |
| BBB | 6.75 | 5.18 | 1.95 | 1.09 | 4.21 | 0.17 |
Spreads tightened across every investment grade sector. Communications bonds tightened the most.
INVESTMENT GRADE CORPORATE BOND SPREADS BY SECTOR (basis points) 1
| Q2 Change | YTD Change | 2025-06-30 | 2025-05-31 | 2025-04-30 | 2025-03-31 | |
|---|---|---|---|---|---|---|
| Consumer Non-Cyclical | -10 | 0 | 74 | 76 | 91 | 84 |
| Technology | -10 | 2 | 67 | 69 | 88 | 77 |
| Energy | -8 | 9 | 101 | 109 | 131 | 109 |
| Consumer Cyclical | -9 | 12 | 84 | 89 | 109 | 93 |
| Transportation | -10 | 7 | 82 | 87 | 104 | 93 |
| Basic Industry | -11 | 1 | 93 | 100 | 119 | 104 |
| Communications | -20 | -5 | 92 | 102 | 121 | 112 |
| Capital Goods | -12 | 0 | 71 | 74 | 93 | 83 |
| Utilities | -10 | 10 | 93 | 97 | 112 | 103 |
| Financials | -10 | 2 | 85 | 90 | 108 | 95 |
High Yield
High yield corporates posted strong absolute and excess returns, led by CCCs. Spreads tightened on BBs and Bs while widening by a single basis point on CCCs.
HIGH YIELD SECTOR RETURNS (%) 1
| Duration (years) | Yield | Q2 Return | Duration adj. vs. Treasuries | YTD Return | Duration adj. vs. Treasuries | |
|---|---|---|---|---|---|---|
| High Yield Corporates | 3.20 | 7.06 | 3.53 | 2.17 | 4.57 | 1.04 |
| BB | 3.46 | 5.89 | 3.44 | 2.06 | 4.98 | 1.36 |
| B | 2.94 | 6.99 | 3.62 | 2.27 | 4.38 | 0.97 |
| CCC | 2.93 | 10.84 | 4.01 | 2.65 | 3.55 | 0.09 |
HIGH YIELD OPTION-ADJUSTED SPREADS (OAS) (basis points) 1
| Q2 Change | YTD Change | 2025-06-30 | 2025-05-31 | 2025-04-30 | 2025-03-31 | |
|---|---|---|---|---|---|---|
| High Yield OAS | -57 | 3 | 290 | 315 | 384 | 347 |
| BB OAS | -48 | -8 | 171 | 191 | 250 | 219 |
| B OAS | -65 | 4 | 281 | 301 | 383 | 346 |
| CCC OAS | 1 | 119 | 677 | 700 | 770 | 676 |
Spreads tightened across every high yield sector. Bonds in the utilities, transportation and consumer non-cyclical sectors tightened the most, while bonds in the energy sector tightened by just one basis point.
HIGH YIELD CORPORATE BOND SPREADS (OAS) BY SECTOR (basis points) 1
| Q2 Change | YTD Change | 2025-06-30 | 2025-05-31 | 2025-04-30 | 2025-03-31 | |
|---|---|---|---|---|---|---|
| Consumer Non-Cyclical | -85 | -38 | 270 | 290 | 376 | 355 |
| Technology | -75 | 6 | 270 | 279 | 360 | 345 |
| Energy | -1 | 61 | 311 | 349 | 447 | 312 |
| Consumer Cyclical | -47 | 9 | 259 | 285 | 340 | 306 |
| Transportation | -84 | 84 | 376 | 426 | 533 | 460 |
| Basic Industry | -47 | 23 | 279 | 315 | 383 | 326 |
| Communications | -78 | -24 | 437 | 458 | 537 | 515 |
| Capital Goods | -60 | 1 | 244 | 262 | 309 | 304 |
| Utilities | -109 | -32 | 161 | 222 | 273 | 270 |
| Financials | -59 | -19 | 222 | 250 | 306 | 281 |
The high yield default rate rose slightly in Q2 but remains flat year-to-date.
HIGH YIELD DEFAULT RATES 2
| Q2 Change | YTD Change | 2025-06-30 | 2025-05-31 | 2025-04-30 | 2025-03-31 | |
|---|---|---|---|---|---|---|
| Number of Issuers in Default | 3 | 0 | 20 | 23 | 17 | 17 |
| Issuer Default Rate | 0.4% | 0.0% | 2.6% | 2.5% | 2.2% | 2.2% |
Municipals & Other
Municipal bonds were among the weakest broad categories in the quarter. Changes in yields were mixed, rising on the long end while staying flat to moving slightly lower on the short- and intermediate parts of the curve.
MAJOR MUNICIPAL BOND INDEX RETURNS (%) 1
| YTW | Duration (years) | Q2 Return | YTD Return | |
|---|---|---|---|---|
| Short Duration (1-5 Years) | 3.02 | 2.66 | 0.75 | 2.11 |
| Intermediate (1-15 Years) | 3.52 | 4.89 | 0.76 | 1.09 |
| Long Duration (22+ Years) | 4.90 | 10.82 | 0.31 | -3.38 |
MUNICIPAL YIELDS BY RATING CATEGORY AND MATURITY (%) 1
| AAA | AA | A | BBB | |||||
|---|---|---|---|---|---|---|---|---|
| 6/30 | 3/31 | 6/30 | 3/31 | 6/30 | 3/31 | 6/30 | 3/31 | |
| 1 Year | 2.57 | 2.54 | 2.67 | 2.70 | 2.85 | 2.99 | 3.69 | 3.64 |
| 5 Year | 2.70 | 2.85 | 2.86 | 3.01 | 3.06 | 3.32 | 3.87 | 3.94 |
| 10 Year | 3.19 | 3.19 | 3.52 | 3.45 | 3.73 | 3.69 | 4.56 | 4.26 |
| 30 Year | 4.47 | 4.21 | 4.91 | 4.51 | 5.14 | 4.63 | 5.89 | 5.30 |
AA MUNICIPALS – HYPOTHETICAL AFTER-TAX YIELDS BY EFFECTIVE TAX RATE (%) 3
| 35% | 30% | 25% | 20% | |
|---|---|---|---|---|
| 1 Year | 4.11 | 3.82 | 3.56 | 3.34 |
| 5 Year | 4.39 | 4.08 | 3.81 | 3.57 |
| 10 Year | 5.41 | 5.02 | 4.69 | 4.39 |
| 30 Year | 7.55 | 7.01 | 6.55 | 6.14 |
Emerging market and global IG bonds posted positive returns. Convertible bonds were also strong. Preferred stocks were comparatively weak.
OTHER SECTOR RETURNS (%) 1,4
| Duration (years) | Yield | Q2 Return | Duration adj. vs. Treasuries | YTD Return | Duration adj. vs. Treasuries | |
|---|---|---|---|---|---|---|
| Emerging Markets | 5.09 | 8.03 | 3.67 | 2.53 | 5.32 | 1.41 |
| Global Treasuries (Unhedged) | 7.16 | 3.04 | 4.83 | 0.13 | 7.54 | 0.27 |
| S&P/LSTA Leveraged Loan 100 | 7.77 | 2.75 | 3.21 | |||
| Wells Fargo Hybrid & Pref. Securities Aggregate Index | 6.76 | 0.60 | -2.46 | |||
| U.S. Convertibles | 0.91 | 1.47 | 8.10 | 6.71 |
Bond Rating Categories
Standard & Poor’s Ratings Group
AAA An obligation rated “AAA” has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
AA An obligation rated “AA” differs from the highest rated obligations only in small degree. The obligor’s capacity to meet its financial commitment on the obligation is very strong.
A An obligation rated “A” is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher- rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.
BBB An obligation rated “BBB” exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
Obligations rated “BB,” “B,” “CCC,” “CC” and “C” are regarded as having significant speculative characteristics. "BB" indicates the least degree of speculation and “C” the highest. While such obligations will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB An obligation rated “BB” is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial commitment on the obligation.
B An obligation rated “B” is more vulnerable to nonpayment than obligations rated “BB,” but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC An obligation rated “CCC” is currently vulnerable to nonpayment and is dependent upon favorable business, financial and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC An obligation rated “CC” is currently highly vulnerable to nonpayment.
C A subordinated debt obligation rated “C” is currently highly vulnerable to nonpayment. The “C” rating may be used to cover a situation where a bankruptcy petition has been filed or similar action taken, but payments on this obligation are being continued.
D An obligation rated “D” is in payment default. The “D” rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless Standard & Poor's believes that such payment will be made during such grace period. The “D” rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action if payments on an obligation are jeopardized.
For educational purposes only. This update provides an overview of certain broad-based Fixed Income benchmarks and does not include performance of the Segall Bryant & Hamill Fixed Income styles. Past performance cannot guarantee future results. All investments involve risk, including the possible loss of capital. All opinions expressed in this material are solely the opinions of Segall Bryant & Hamill. You should not treat any opinion expressed as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of the manager’s opinions. The opinions expressed are based upon information the manager considers reliable, but completeness or accuracy is not warranted, and it should not be relied upon as such. Market conditions are subject to change at any time, and no forecast can be guaranteed. Any and all information perceived from this material does not constitute financial, legal, tax or other professional advice and is not intended as a substitute for consultation with a qualified professional. The manager’s statements and opinions are subject to change without notice, and Segall Bryant & Hamill is not under any obligation to update or correct any information provided in this material.
1 Source: Bloomberg.
2 Source: Bank of America Merrill Lynch.
3 Hypothetical yields are calculated as the AA municipal yield divided by (1-tax rate). Actual tax-adjusted yields will depend on individual tax circumstances.
4 Source: Standard & Poor’s.
