Payden & Rygel. Fixed income markets turn positive after tariff-led volatility
In mid-May, Payden & Rygel’s Global Credit Strategist Timothy Crawmer, and US Rates Strategist Eric Stratmoen provided an overview of market conditions so far and their view of risks and opportunities in the bond markets. Here’s what they said.
Executive summary
Macro-economic trends
Markets started strong in 2025 on high expectations for growth but ran into turbulence in March on fear and uncertainty surrounding tariffs.
President Trump’s Liberation Day announcement of steep tariffs in early April accelerated a fall in rates and widening in spreads. However, by mid- to late-April, the administration has walked back tariff rhetoric and markets have responded positively.
Corporate bond market fundamentals remain strong. Corporate issuers are employing only moderate leverage—and many have locked in lower rates with long-dated bonds. Investor demand is robust.
However, it’s clear that global investors are selling and/or hedging US Dollar denominated assets.
The Treasury market
Tariff policy has created a lot of noise, but the economy is still on a firm footing, with employment still strong but softening, growth moderating and inflation in check.
Foreign investors are wary of long-dated U.S. Treasuries, both because of concerns about the U.S. economy and doubts about the U.S. as a reliable trading partner. As a result, we are adding duration in the mid-section of the yield curve, that is, in 5- to 7-year Treasuries rather than 10- and 30-year bonds.
Opportunities and risks in fixed income sectors
In the U.S. we are overweighting banks, which were heavily affected by early year volatility but now are seeing spreads narrowing. We’ve de-emphasized energy, given falling oil prices and shifts in supply and demand.
Foreign investors are selling U.S. Treasuries, but not enough to significantly move markets. Sharp increases in 30-year Treasury rates in April were likely driven by other factors, including a repricing of the term premium and hedge funds unwinding swap spreads trades.
A Deeper Dive
A Strong Economy Hits a Rough Patch
Tim Crawmer: I'm going to touch on overall macro conditions, how we're viewing them at Payden, how we think they’ll evolve, and the implications for the fixed income markets. Then I’ll pass it off to Eric to go more in-depth on government bond yields and the Treasury market, which has been the epicenter of volatility.
Starting with the macro picture, it’s hard to talk about where we’re going without first looking at what’s already happened this year. To recap: we came into 2024 on a really positive note. Investors were upbeat about the pro-growth agenda expected from the Trump administration, with a lot of talk about U.S. exceptionalism. That optimism was reflected in fixed income markets, with yields rising and credit spreads tightening.
As we moved into 2025, the focus began shifting to tariffs—particularly starting in March. That’s when we saw interest rates begin to fall and credit spreads widen. The volatility accelerated through Liberation Day and the two weeks that followed. Since mid-to-late April, the Trump administration has started walking back some of that tariff rhetoric, easing off the levels announced on April 2nd. Markets responded positively, and we’ve seen a significant retracement.
Strong Fundamentals for Corporate Bonds
Looking at corporate bond markets, we began the year with strong fundamentals. Issuers had prepared themselves well, having gone through major stressors over the past five years—COVID, the Ukraine crisis, and the 2022 rate hikes. As a result, they maintained conservative balance sheets, low leverage, and had termed out debt at lower borrowing costs. Fundamentally, they were in good shape.
Technicals were also supportive. Investors were eager to lock in higher all-in yields, driving strong demand for fixed income. But valuations reflected that strength: spreads were already tight. Investment grade corporate spreads were around 75–80 basis points; high yield was in the mid-200s.
Then, in March and April, credit spreads widened. Investment grade corporates moved about 30 basis points wider, and high yield widened by 150 basis points. But as the market sensed the Trump administration was walking back tariff plans, risk assets rallied alongside equities. High yield, which had widened to 450 basis points, has since tightened to the 385 area. Even lower-rated CCC bonds, which blew out north of 1,000 basis points, have come back into the high 800s. It’s been close to a full round trip.
Markets Are Returning to Normal
As of today, markets feel fairly positive. There’s strong demand for new corporate issuance, and markets are almost back to where they were before the April volatility—at least from a valuation perspective.
Our view is that the current optimism may be a bit overdone. We've retraced a lot, and uncertainty still lingers. So, we’re using this rally as an opportunity to sell some corporates—particularly in high yield—and move up in quality and liquidity. While we remain cautiously optimistic that a soft landing is achievable, risks around policy and trade still loom.
Dollar Flight Is a Concern
Another dynamic we’re watching is behavior among foreign investors, particularly in Europe. Many have begun shifting away from U.S. exposure and reallocating closer to home. As a result, European corporates held up better during the recent volatility. They didn’t widen as much as U.S. names and have already recovered.
On the currency front, many global equity investors had previously left their U.S. exposure unhedged, betting on continued US Dollar outperformance. That view has reversed. The dollar has sold off, and hedging activity has increased. European investors, for example, are increasingly hedging back to the euro. We think that trend still has room to run, which could be a further headwind for the dollar.
Reducing Energy Exposure, Keeping a Focus on Banks
Earlier this year, most sectors traded in lockstep. But the tariff headlines introduced some dispersion—autos being a good example. BBB-rated auto names, especially the weaker ones, widened by 100 to 120 basis points in April. Many of those have since retraced, and while they’re less attractive now, that volatility offered good opportunities to selectively add risk in names we like—even in a higher-tariff world.
One sector we continue to like is banks. They tend to get caught in macro volatility due to their cyclical nature, and we saw spreads widen in April. We used that as a buying opportunity, reducing exposure to energy to fund it. We remain cautious on energy given weak oil price dynamics and OPEC-related supply pressures. So, more positive on banks, more cautious on energy.
Lots of Noise, Little Change in U.S. Treasury Markets
Eric Stratmoen: When I sat down to prep, I joked that if I’d taken a two-month vacation and someone told me unemployment was 4.2% and CPI was 2.3%, I’d think not much had happened—just business as usual.
As long-term investors, we’re focused on broader trends. Our view entering the year, as Tim noted, was that growth was moderating, the labor market was softening, and inflation was trending lower. The Trump administration’s policies—tariffs, immigration, and fiscal tightening—were generally seen as headwinds to growth. So, while we didn’t expect a recession, we thought a bullish stance on duration was justified.
So, what’s changed? Tariffs have been eased somewhat, and economic data hasn’t shifted much. Inflation continues to moderate. From our perspective, not a lot has fundamentally changed.
Treasury Market Uncertainty Mostly Affects the Long End
We’re still comfortable being long duration, but the uncertainty has affected the longer end of the curve. That’s showing up in swap spreads, 30-year yields, and the term premium. The narrative that foreign investors are pulling back from U.S. Treasuries and demanding more compensation makes sense—and we think it’s one to watch.
As a result, we’re favoring duration in the belly of the curve—five- to seven-year maturities—rather than the long end.
Meanwhile, we’re still monitoring policy headlines: tariffs, tax proposals, and general volatility. But we continue to anchor our strategy in long-term fundamentals.
Non-Dollar Government Bonds vs. Treasuries
We’ve noticed a shift in interest from Treasuries into global sovereign bonds. However, while some April headlines pointed to a “fire sale” by foreign investors, we didn’t see evidence of that. Long term, though, we do expect a reassessment of the role of Treasuries in foreign central bank portfolios.
The media focus on China pulling back from Treasuries got a lot of attention. But China holds less than 3% of the outstanding market, and their holdings are mostly short-term. So even as 30-year yields spiked in April, we don’t see that as a major driver. More significant, in our view, was the repricing of the term premium and the unwind of leveraged swap-spread trades by hedge funds.
