Wire to Wire in the First Half of 2025

Standing at the midpoint of 2025, it’s clear that global markets have been anything but ordinary. From DOGE-driven political movements pushing for aggressive government spending cuts, the most sweeping overhaul of global tariffs in decades, and renewed geopolitical tensions in the Middle East, the first half of the year delivered a steady stream of market-moving developments. All of this played out against a backdrop of record budget deficits and a decelerating global economy. So how did markets respond? In this edition of Notes, we examine the first-half performance of key fixed income markets — highlighting steepening global yield curves, subdued inflation expectations in the US, and a notable absence of credit risk premium pricing.

US Treasury yields declined in the first half of 2025, led by the front end of the curve — a textbook bull steepening. But it wasn’t just a domestic phenomenon. Yield curves steepened across major developed markets, underscoring the global nature of the move. The reemergence of the “term premium” narrative has clearly extended beyond the US, reflecting broader concerns around fiscal sustainability and long-term inflation risks. Still, despite the headlines warning of runaway yields and eroding central bank credibility, actual market behavior paints a more tempered picture — one of an orderly repricing rather than disorder or panic.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, Bloomberg

Market expectations for Fed policy have shifted meaningfully over the first half of 2025. At the start of the year, pricing implied roughly 1.5 rate cuts, but that number has climbed to 2.5 as inflation continues to decelerate and economic data has consistently surprised to the downside. The path hasn’t been linear, however— April saw a sharp spike in rate cut expectations amid heightened concerns over the impact of new tariffs. While the Fed remains data-dependent, the outlook is increasingly shaped by how much of these tariff pressures ultimately filter through to core inflation. For now, the market is leaning toward a more accommodative stance, but uncertainty remains high.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, Bloomberg

Market-based inflation expectations have remained relatively stable through the first half of 2025, particularly in the US, where break-even numbers have shown little net movement. In contrast, breakeven inflation has risen in Japan, reflecting a gradual shift in domestic inflation and policy tone. The UK and Germany have seen notable declines, largely driven by falling energy prices and easing supply-side pressures. Despite the noise – from tariffs to geopolitical risks – US inflation expectations remain well-anchored.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, Bloomberg

Credit markets have remained remarkably resilient through the first half of 2025. Despite a volatile macro backdrop, both investment grade and high yield corporate spreads are virtually unchanged on the year, each just 6 bps wider. High yield spreads briefly spiked to 450 bps during the April volatility episode, but quickly retraced, now sitting below 300 bps. The stability in credit risk premium suggests that, despite the headlines, investors continue to view corporate fundamentals as sound and systemic risk as contained.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, Bloomberg

As we enter the second half of 2025, markets face a new set of challenges and catalysts. One of the most closely watched developments will be the debate over extending the 2017 tax cuts — a decision with significant implications for fiscal policy and Treasury supply. At the same time, the trajectory of economic data will remain front and center, particularly as markets assess how much of the recent tariff overhaul ultimately feeds into core inflation. With policy uncertainty still elevated and global growth showing signs of fatigue, the second half promises to be just as eventful as the first — if not more so.

 

 

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