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.

 

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

There’s a new twist developing between President Donald Trump and Federal Reserve Chair Jerome Powell. What began as a difference in economic philosophy has evolved into a full-blown policy tug-of-war, complete with social media jabs, press conference poker faces, and enough market speculation to move yields.

The Core of the Conflict

President Trump has been vocal—especially on social media—about his dissatisfaction with the Fed’s current monetary policy stance. Following multiple rate cuts last fall, Powell has since adopted a more cautious tone, citing concerns over tariff-driven inflation and maintaining that the current policy rate is “mildly restrictive.” Trump, on the other hand, is pushing for further rate cuts to stimulate economic growth and reduce the federal government’s ballooning interest expense.

From a bond investor’s standpoint, this divergence is more than political theater—it’s a signal of potential volatility in rate expectations and market pricing.

The Trump Card: A New Fed Chair?

While Powell holds significant sway over the FOMC, his term ends in May 2026. Recent reports suggest that President Trump is considering announcing his pick for the next Fed Chair as early as this summer or fall—well ahead of the traditional transition timeline. This move, while unconventional, could be strategic.

An early announcement would allow the chair-in-waiting to shape market expectations, potentially nudging the Fed toward a more dovish stance even before Powell’s term concludes. For bond investors, this introduces a new variable: the possibility of a “shadow pivot” in policy direction, driven not by data but by political signaling.

Market Reaction: Reading the SOFR Tea Leaves

Despite Powell’s reaffirmation of a “wait and see” approach at the June FOMC meeting and in recent congressional testimony, the market appears to be pricing in a different outcome. The yield on March 2026 SOFR futures has fallen over the past few days, suggesting that investors are anticipating additional rate cuts in the coming quarters.

This divergence between Fed guidance and market pricing is a classic setup for volatility. If Powell holds firm and inflation remains sticky, yields could snap back upward. However, if political pressure or economic data forces the Fed’s hand, we could see a rally in the front end of the curve.

Strategic Implications for Bond Investors

The tension between President Trump and Chair Powell is more than a political spat—it’s a fundamental tug-of-war over the direction of U.S. monetary policy. Navigating this landscape will require vigilance, flexibility, and a keen eye on both Washington and the Fed’s next move.

In this environment, bond investors should consider the following:

• Duration Management: With uncertainty around the Fed’s path, maintaining a balanced duration profile is key. Overcommitting to either short or long duration could expose portfolios to unnecessary risk.
• Inflation Hedging: Tariff-driven inflation remains a wildcard. TIPS and other inflation-protected instruments may offer valuable diversification.
• Fed Communication Monitoring: Pay close attention to speeches, minutes, and any signals from potential Fed Chair nominees. These could offer early clues about future policy shifts.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our website at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

Fixed income investors are often caught in a balancing act: the pursuit of higher yields versus the need to manage risk. In today’s environment, where investment grade municipal bonds offer modest returns, many investors are drawn to high-yield municipal bonds for their significantly higher income potential. Historically, this strategy has paid off — especially when investments are made through diversified, commingled funds that offer liquidity buffers.

However, this approach can mask a critical vulnerability: the underlying illiquidity of many high-yield municipal securities. These bonds, often tied to niche or speculative projects, can be difficult to price and even harder to sell in stressed markets.

A recent and dramatic example underscores this risk. The Easterly ROCMuni High Income Municipal Bond Fund experienced a nearly 50% drop in net asset value (NAV) in just one day — falling from $6.15 on June 12 to $3.16 on June 13.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Bloomberg

This sharp decline was triggered by the fund’s forced liquidation of illiquid holdings, including debt from biofuel ventures, recycling plants, and retirement facilities — sectors known for their limited trading activity and opaque pricing.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Bloomberg

Because municipal bonds are typically priced using models rather than actual market transactions, the gap between theoretical value and real-world sale prices can be vast — especially during periods of forced selling. This event highlights the potential for significant losses, even in a market segment that has delivered strong returns over the past decade.

At Sage, we’ve long emphasized the importance of liquidity and credit quality. Our commitment to investment-grade municipal bonds ensures that our clients benefit from transparency, stability, and real market pricing. While high-yield bonds can play a role in a diversified portfolio, investors must remain vigilant about the hidden risks — particularly those tied to liquidity and price discovery.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our website at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

The US Census Bureau’s May retail sales report came in weaker than expected, with the headline measure — total nominal sales — down 0.9% on the month. It’s the largest drop in nearly two years and reflects broad-based softness across categories like autos, gas stations, and restaurants. April was also revised down to a mild decline, which on the surface could indicate that the US consumer may be catching its breath.

But the headline overstates the weakness. When you strip out the volatile categories — autos, gas, building materials, and food services — the so-called control group, which feeds into GDP, was actually up 0.4% on the month and 5% year-over-year. That’s the healthiest monthly gain in this core category since January. On a monthly basis, core retail sales have been relatively stable and positive over the past year.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, US Census Bureau 

E-commerce and general merchandise stores continue to show momentum, and the stability in control group spending suggests consumers are still spending on staples and discretionary items alike. The weakness in auto sales and gas station receipts may be more about normalization than retrenchment — especially after a pull-forward in April ahead of potential tariffs.

On the surface, the retail sales report is another data point in a string of softer-than-expected prints, reinforcing the idea that the economy is cooling. But the internals indicate that the consumer hasn’t rolled over — they’re just getting more selective. Control group strength points to real consumption still running at a solid clip, which lines up with GDP tracking estimates in the 2% to 3% range for Q2 based on current Fed Nowcasting estimates.

 

 

 

 

 

 

 

 

 

 

 

 

Source: NY Fed, Atlanta Fed, Sage 

Data like the retail sales figures continue to point to a cooling economy that remains in expansion. The FOMC’s summary of economic projections, released last week alongside its policy statement, showed a slowing growth forecast through 2027 compared to the March release, while inflation is forecasted to run higher than was forecasted in March. Yet, the median path for the Fed funds rate for 2025 remains at two cuts.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, Bloomberg 

To us, the current policy stance in light of the forecast revisions from the FOMC reflects the committee’s continued asymmetric focus on preventing a slowdown via lowering interest rates rather than fighting inflation through rate hikes.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

While recent inflation readings have been softer than expected, the more immediate inflation risk may come from rising energy prices driven by renewed geopolitical instability. Tensions between Israel and Iran have pushed oil prices higher, reminding policymakers and markets that while spot inflation is cooling, energy remains the most likely catalyst for near-term inflation surprises.

Core inflation has eased in recent months. May’s CPI came in below expectations, rising 0.08% on the month (2.35% YoY), with core CPI rising 0.13% in May (2.79% YoY). PPI has softened as well, with little sign of upstream pressures feeding into consumer prices. Most importantly for the Fed, recent inflation readings mean that core PCE should be lower than previously thought as well.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Citi, Bloomberg 

While tariffs can raise input costs, the muted market response and recent prints suggest these effects may take time to work through the supply chain. This reflects the narrow scope of the tariffs. Many affected goods are a small share of consumer spending, and producers may initially absorb costs. Broader disinflationary trends — inventory normalization, lower shipping costs, and weaker discretionary demand — could have offset tariff pressures.

In contrast, oil’s rise introduces a more immediate inflation risk. Middle East tensions have escalated, raising concerns over crude supplies through the Strait of Hormuz. Since early May, WTI crude has climbed from a low of $55 to the low $70s. Markets are pricing in higher risk premiums as broader conflict risks rise. As we’ve mentioned in a prior Notes, the price movement of spot crude moves in-line with long-term inflation expectations. Long-term inflation expectations have not responded to the recent oil price shock, although it could be too early to call as it has been less than two trading sessions as of the writing of this Notes.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Bloomberg

Oil price spikes filter into inflation quickly. Higher energy prices push up headline CPI directly and raise transportation, utility, and input costs. If oil stays elevated or climbs, inflation prints could rise by late summer, just as the Fed faces key rate cut decisions.

Markets have priced in nearly two 25 bps rate cuts through December, encouraged by softer inflation and a cooling labor market. But renewed energy volatility complicates that outlook. While the Fed has signaled that it can look past short-term energy swings, sustained price increases spilling into core inflation or expectations may force the Fed to stay on hold for longer. For now, expectations remain anchored, but another oil surge could challenge whether policy is “sufficiently restrictive.”

Recent data suggests that the US economy is absorbing tariff shocks better than feared, with price effects unfolding gradually. This gives the Fed room and keeps the disinflation narrative intact. But energy markets could change that calculus. As geopolitical risks remain, energy prices now represent the clearest upside risk to inflation. If oil continues climbing or stays elevated, the second half of 2025 may become a more complicated balancing act — resilient disinflation on one hand, and renewed energy-driven pressure on the other.

 

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

 

With uncertainty swirling around potential tariff actions — particularly the scope and timing of April’s proposed measures — US importers have accelerated their orders to get ahead of possible disruptions. That pull-forward has distorted economic optics, amplifying trade’s contribution even as domestic demand has remained relatively stable.

Imports as a share of GDP rose sharply in Q1 to historic levels, suggesting that the drag on growth was more about timing than fundamentals. In the GDP accounting framework, imports are subtracted from total output because they represent spending on goods and services not produced domestically. When imports rise sharply without a corresponding increase in exports or domestic production, they create a negative contribution to GDP — even if underlying demand remains strong. Conversely, a decline in imports can mechanically boost GDP by reducing that drag, even if it’s driven by inventory normalization or weaker consumption. This makes trade flows a frequent source of noise in quarterly growth figures, often obscuring true economic activity.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, BEA 

That surge now appears to be reversing. The ISM Manufacturing Index’s imports component has slipped below Covid-era contraction territory, a signal that import activity is cooling as firms digest elevated inventory levels built earlier in the year.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, ISM

This reversal is already feeding into real-time growth tracking. The Atlanta Fed’s GDPNow model projects a healthy rebound in Q2 GDP, with net exports swinging from a significant drag to a meaningful tailwind, with total GDP growth for Q2 expected to print near 4%. A front-loaded import spike subtracts from one quarter’s GDP, followed by an import pullback that boosts the next.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, Atlanta Fed

But beyond quarterly arithmetic, importers’ willingness to act preemptively introduces a latent cushion into the economy — inventory buffers and forward positioning that can absorb supply chain stress before it filters into consumer prices. In the near term, this could delay inflationary pass-through, lowering the urgency of a policy response.

While the underlying growth dynamic remains weaker than in 2024, the likely Q2 rebound should ease fears of an imminent recession. If tariff risk remains live or escalates, this pattern is likely to repeat: episodic hoarding, inventory payback, and supply chain volatility that blunts business confidence and weighs on capital formation. None of this suggests a hard landing. But it does imply that the expansion will remain vulnerable to exogenous shocks and structurally constrained by policy uncertainty.

In short, the growth trend remains positive, but fragile. Import behavior in Q1 wasn’t a signal of strength or weakness — it was a hedge. And the more firms feel the need to hedge against policy, the harder it becomes to sustain real momentum.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

Recently, there has been a renewed push from policymakers in Washington to explore the privatization of the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac. Given the importance of implied or direct government backing of the mortgage market and its benefits to the private sector, there appears to be little net benefit to fully privatizing the GSEs.

Fannie Mae and Freddie Mac play a central role in the US housing finance system. These GSEs were created to stabilize the mortgage market and promote homeownership and access to credit, particularly for low- and moderate-income households. The 2008 financial crisis marked a turning point when the GSEs were placed into federal conservatorship; however, in the years since, they have returned to profitability and repaid the Treasury in excess of the original bailout amount. Their continued operation under conservatorship has allowed for tighter oversight and risk-based pricing, which has helped protect taxpayers from future losses.

Households have also benefited from these GSEs. By providing liquidity and standardization in the secondary mortgage market, GSEs have helped keep mortgage rates lower than they might otherwise be — especially during periods of market stress, such as the Covid-19 pandemic. Their support for 30-year fixed-rate mortgages, in particular, has offered long-term affordability and stability for homeowners. Innovations in credit risk transfer and capital frameworks have further reduced systemic risk while maintaining broad access to mortgage financing.

Privatizing Fannie Mae and Freddie Mac would represent a fundamental shift in the US housing finance system. We see the major implications as follows:

• Higher Mortgage Rates: Privatized GSEs would lead to tighter credit standards and higher mortgage rates, as investors in agency mortgage-backed securities (MBS) demand higher yields to compensate for the reintroduction of mortgage credit risk. Current market data supports this concern; non-agency mortgage rates generally charge higher yields than loans underwritten to GSE lending standards. This could reduce access to affordable home financing, especially for first-time buyers and underserved communities.
• Increase Home Price Volatility: The housing market could experience increased volatility in the absence of a government-backed stabilizing force. During economic downturns, the GSEs have historically played a countercyclical role by continuing to provide liquidity when private capital retreats. Privatization could weaken this function unless alternative mechanisms — such as a government mortgage insurance fund or a public utility model — are put in place.
• Protracted Timeline: The timeline to disentangle the GSEs from the Treasury would be lengthy and potentially problematic. The process depends on the political will and regulatory changes involved. Privatization will require coordination between the Federal Housing Finance Agency (FHFA), the Treasury, and potentially Congress for legislative approval. Coordinated action across multiple layers of the federal government would likely span multiple presidential terms.
• Recapitalization: While privatization would result in funds potentially flowing to the US Treasury via the equity sale of the GSEs, a significant amount would be required to recapitalize the now-private entities. The GSEs have been allowed to retain earnings since 2019 to begin rebuilding capital buffers. However, under current capital requirements set by the FHFA, both Fannie and Freddie would need to accumulate roughly $250 billion dollars in capital to meet the thresholds required for safe operation outside of conservatorship. This process alone could take 5 to 7 years through organic earnings growth.
• Government Backstop Could Remain: Privatization could, in theory, transfer risk from taxpayers to private shareholders and creditors. However, without a clear and credible resolution framework, taxpayers may still assume some level of government support in a crisis, potentially limiting the fiscal benefits. Moreover, if privatized entities were to face financial distress, the government might still feel compelled to intervene, similar to 2008.

The push to privatize Fannie Mae and Freddie Mac may generate headlines, but in reality, the implications are clear: the risks tied to full privatization outweigh the potential rewards. The GSEs have played a key role in keeping mortgage markets liquid and stable, especially during downturns. Their current conservatorship model has allowed for tighter oversight and steady returns without exposing taxpayers to undue risk. Privatization could lead to higher mortgage rates, tighter credit, and more market volatility. The long and uncertain path to privatization combined with the likelihood of continued government involvement in a crisis also add to the complexities around privatization.

For now, the more compelling investment thesis lies in monitoring how the GSEs evolve within the current framework, rather than positioning for a full exit from government control. We maintain a constructive view on agency MBS, given the continued support from the GSEs and the structural benefits they provide to the housing finance system.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

The US housing market remains in a state of inertia. Despite the arrival of the spring selling season, both new and existing home sales continue to underwhelm. In April, existing home sales fell to an annualized pace of 4 million units — down 2% from a year earlier and well below the pre-pandemic average of over 5 million. New home sales, while slightly more resilient, have also plateaued as affordability pressures mount.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, National Association of Realtors

Mortgage rates are a key factor. As of late May, the average 30-year fixed mortgage rate remains near 6.84%, a level that has persisted for months. These elevated rates have created a lock-in effect: homeowners with sub-4% mortgages are reluctant to sell, while buyers face higher monthly payments and tighter credit conditions.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, Bankrate.com

The result is a market with limited inventory and muted activity. Even though active listings have increased year-over-year, total inventory remains 16% below pre-pandemic levels. Home prices, meanwhile, are showing signs of softening. Zillow now expects national home values to decline by 1.4% in 2025 — a modest but notable shift after years of rapid appreciation.

Sentiment reflects this cooling. A Q1 2025 Realtor.com survey found that nearly two-thirds of prospective buyers expect a recession within the next year. While some see that as a potential buying opportunity, many remain cautious — concerned about job stability, credit access, and the risk of overpaying in a market that feels increasingly uncertain.

Even as the housing market remains subdued, agency mortgage-backed securities (MBS) have emerged as a bright spot, drawing investor attention due to their evolving risk profile and attractive valuations.

Agency MBS are bonds backed by pools of residential mortgages and issued by government-sponsored enterprises (GSEs) such as Fannie Mae, Freddie Mac, and Ginnie Mae. These securities are considered to carry minimal credit risk due to their implicit or explicit government backing. However, they are still subject to other forms of risk — primarily interest rate risk and prepayment risk.

In a typical environment, prepayment risk is a major consideration. When interest rates decline, homeowners often refinance at lower rates, causing MBS to prepay earlier than expected. As a result, investors receive their principal sooner and are typically forced to reinvest at lower yields. But in today’s high-rate environment, refinancing activity has slowed dramatically. This has reduced prepayment volatility and made the cash flows from agency MBS more predictable.

At the same time, spreads on agency MBS remain elevated. This is partly due to a shift in demand dynamics. The Federal Reserve, once a major buyer of MBS during its quantitative easing programs, has been reducing its balance sheet. Commercial banks — another traditional source of demand — have also pulled back following the regional banking stress of 2023. With fewer natural buyers in the market, spreads have widened relative to historical norms, and are even considered cheap relative to corporate bonds in an environment of higher earnings uncertainty.

Adding another layer of complexity is the renewed discussion around the potential privatization of government-sponsored enterprises (GSEs) under the Trump administration. President Trump has recently stated that he is giving “very serious consideration” to taking Fannie Mae and Freddie Mac public. While this idea has surfaced before, past efforts to privatize the GSEs have faced significant legal, political, and logistical hurdles. The conservatorship structure, in place since 2008, has proven difficult to unwind, and many in the housing and financial sectors remain skeptical that a full privatization can be executed without disrupting the mortgage market.

Nonetheless, President Trump has emphasized that any move toward privatization would retain the implicit government guarantee that underpins the stability of agency MBS. That assurance may help temper market volatility, but the path forward remains uncertain.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, Bloomberg

In a fixed income landscape where high-quality yield is increasingly scarce, agency MBS stand out for their relative value. Despite carrying no credit risk, current coupon MBS are trading at spreads well above historical averages — offering a meaningful pickup over comparable-duration Treasuries. Importantly, these elevated spreads are not being driven by deteriorating fundamentals. Prepayment risk has diminished in the current rate environment, and the underlying credit quality remains strong due to the government-sponsored nature of the issuers. In a market starved for high-quality yield, agency MBS offer a rare combination of stability, attractive spreads, and reduced volatility — making them a compelling option for income-focused investors navigating today’s uncertain environment.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

Federal Reserve Chair Jerome Powell delivered the opening remarks at last week’s Thomas Laubach Research Conference, focusing on the Federal Open Market Committee’s (FOMC) review of its Monetary Policy Framework. The Fed is committed to conducting a public review every five years to ensure the framework remains responsive to changing economic conditions. The last assessment was in 2020, during the Covid-19 pandemic, and the review that is taking place now is expected to result in updates that could shift how the Fed responds to economic and financial developments.

The Consensus Statement

The Federal Reserve’s dual mandate — promoting maximum employment and maintaining stable prices — was established by Congress in 1977 in response to the economic challenges of the 1970s. While the mandate guided monetary policy, it lacked specific metrics for evaluating progress. In 2012, the Fed introduced the Statement on Longer-Run Goals and Monetary Policy Strategy, known as the “consensus statement,” to clarify how it would pursue its objectives.

In response to low interest rates, low inflation, and low unemployment post-Great Financial Crisis (GFC), the Fed began a review of its policy framework in 2019, which ended in 2020. A key outcome was the adoption of flexible average inflation targeting (FAIT), which allowed inflation to exceed the 2% target after periods of undershooting, to better anchor expectations.

The 2020 review also changed how the Fed evaluates labor market conditions. Instead of responding to both upward and downward movements from maximum employment, the Fed began focusing on “shortfalls” from full employment — signaling a more patient stance.

As the chief concern at the time was persistent disinflation, the modifications in 2020 resulted in less reactive policy shifts that were asymmetrically dovish. The economic environment changed soon after these adjustments. The Covid-19 pandemic triggered a surge in inflation, and while the Fed responded, it underestimated the persistence of inflationary pressures.

From the GFC to the Post-Pandemic Era

Today, the Fed faces different challenges. Real interest rates are higher, inflation volatility has increased, and supply-side disruptions are more frequent. Powell recently addressed this shift:

“Higher real rates may also reflect the possibility that inflation could be more volatile going forward than in the inter-crisis period of the 2010s. We may be entering a period of more frequent, and potentially more persistent, supply shocks — a difficult challenge for the economy and for central banks.”

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, Federal Reserve, BEA 

The Fed appears ready to revise its framework again. According to Powell, FOMC participants have shown interest in reexamining the language around employment shortfalls and reassessing average inflation targeting. The Fed is also considering changes to how it communicates forecasts and uncertainty.

Refreshing the Policy Framework and Communications

As the Fed reviews its policy framework, several areas may change. The experience of the past few years — marked by a pandemic, inflation, and a delayed tightening cycle — has highlighted the need for a framework better suited to managing supply shocks and inflation volatility. One likely adjustment is to how the Fed approaches average inflation targeting. While FAIT was designed to address inflation undershooting, its application during a period of rising inflation revealed limitations. The language around employment shortfalls may also be reconsidered. The 2019 focus on shortfalls was appropriate in a low-inflation environment, but in today’s context, a more balanced approach may be necessary to avoid the perception of excessive tolerance for inflation in pursuit of labor market goals.

Future iterations of the framework may place less emphasis on past deviations from inflation or employment targets and instead prioritize a more responsive stance. This could lead to quicker policy adjustments and, as a result, greater variability in interest rate outcomes — introducing more volatility into rate markets.

The Fed is also evaluating how it communicates policy. As outlined in Ben Bernanke’s recent Brookings proposal, clearer and more structured messaging could enhance policy effectiveness. One suggestion is a quarterly “Monetary Policy Report Summary,” which would provide a plain-language explanation of the FOMC’s outlook, policy rationale, and associated risks. Importantly, it would also include alternative scenarios to help the public understand how the Fed might respond if its base case proves incorrect. Additionally, given the market’s focus on the “dot plot” as a signal of future rate paths, the Fed may consider revising how it presents its projections for the federal funds rate.

A shift toward a more flexible and less formulaic policy approach could increase uncertainty around the timing and magnitude of rate changes. This may lead to more frequent repricing across financial markets, particularly in interest rates and risk-sensitive assets. While this could present challenges, it also creates opportunities for investors who can interpret evolving policy signals and adjust their positioning accordingly.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.

Despite the announcement of new tariffs, long-term inflation expectations—as measured by the 5y5y inflation rate—have remained stable. This rate, which reflects expected average inflation over a five-year period starting five years from now, is a key indicator of market sentiment on long-term inflation and is typically derived from TIPS or inflation swap markets.

From April 2 to May 12, the 5y5y rate stayed flat, even though tariffs are expected to raise costs. Since the November election, the rate has actually declined by 10 basis points to 2.26%.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, Bloomberg

Several factors help explain why long-term inflation expectations have remained stable despite the announcement of new tariffs. First, market uncertainty around the implementation of tariffs likely played a role. Investors may have anticipated that the proposed tariffs would be delayed or softened, a view that was validated when the US and China agreed to a 90-day postponement following in-person negotiations. This delay signaled a potential de-escalation in trade tensions, mitigating the perceived inflationary risk.

Moreover, the nature of tariffs themselves may limit their impact on long-term inflation expectations. Tariffs are generally seen as a one-time shock to prices, influencing short-term inflation more than the long-term trajectory. As such, markets may have discounted their relevance to the broader inflation outlook.

Additionally, concerns about the broader economic impact of tariffs may have further dampened inflation expectations. Tariffs can compress corporate profit margins and weaken aggregate demand, both of which are deflationary forces. Rather than fueling inflation, these effects could signal slower economic growth, which tends to suppress price pressures over time.

Another important factor is the behavior of energy markets, which are closely tied to inflation expectations. Oil prices have declined amid increased supply from OPEC+, contributing to a more subdued inflation outlook. Since energy is a key input cost across the economy, falling oil and gasoline prices can exert downward pressure on inflation expectations.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, Variant Perception, Bloomberg 

Finally, confidence in the Federal Reserve’s credibility appears to be anchoring long-term inflation expectations. Despite recent economic volatility, the 5y5y inflation rate has remained close to the Fed’s 2% target. This suggests that markets still trust the Fed’s ability to maintain price stability over the long run, even in the face of fiscal and geopolitical uncertainty.

 

 

 

 

 

 

 

 

 

 

 

 

Source: Sage, Bloomberg 

While tariffs typically signal upward pressure on prices, markets appear unconvinced that recent trade developments will meaningfully alter the long-term inflation landscape. The resilience of the 5y5y inflation rate underscores investor confidence in the Federal Reserve’s ability to anchor inflation expectations and reflects broader forces — like global energy prices and demand outlooks — that continue to exert a stronger influence on long-term inflation sentiment than short-term policy shifts.

 

Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.