Payden & Rygel: Risk-free US government yields
Volatility characterized the bond market in the first half of 2025. Stepping back, we'd like to remind investors that risk-free government yields remain elevated.
High risk-free yields have two implications. First, investors are being compensated more than they were during the 2010s for taking on additional duration risk. Second, elevated risk-free yields increase the corporate bond yield cushion, which is defined as yield per unit of duration.
In other words, the yield today could generate enough income to help offset a modest widening in corporate spreads. Why is that important?
As Chair Powell suggested during his testimony with Congress this week, the next move for the Fed will likely be a cut, just sooner or later, depending on inflation and labor market data. Consequently, if inflation remains contained and the Fed cuts, government yields will trend lower across the curve in the next six to twelve months.
On top of that, the corporate yield cushion today should buffer investors against the downside risk that spreads widen if the economy were to weaken. Amidst the flurry of headlines we believe it is crucial to look beyond the volatility and remain mindful of the underlying market trends.
