Bond market mid-year review – What’s the story?
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Article Type
BondTalk
Topics
Credit, Debt, Macro
Published
July 10, 2025
Read time
6 mins
Author
Colin Finlayson, CFA
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As we reach the middle of 2025, we face a set of circumstances that are both fairly unique and strangely familiar. Think ‘bond vigilantes’, conflict in the Middle East, US deficit concerns, widespread higher fiscal spending and a UK Labour Government. Sound familiar? 

 

Yes, it seems that there are nods to the 1990s all around. And with ‘Britpop’ making a comeback this Summer too, let’s get nostalgic and flick through Oasis’s back catalogue to see what’s the story  with bond markets, so far this year?

 

US trade tariffs – “Definitely maybe”

 

US trade tariffs have been the biggest story. Although not a new idea, the unpredictable manner in which they were implemented alarmed the market. After the Liberation Day announcement, a pattern of threats, delays and climbdowns followed, creating huge uncertainty.   

 

Regardless of the finer details, average US tariffs are expected to settle at a higher level than previously anticipated, and the economic implications for the US and the rest of the world will begin to unfold in the second half of the year.

 

Fiscal spending and deficits – “Whatever”

 

Fiscal spending, deficits and bond issuance have featured on both sides of the Atlantic. In the UK, the Gilt market was pressured by the government's shrinking fiscal headroom. Germany, meanwhile, announced its massive EUR500 billion defence and infrastructure spending package, causing a record one-day surge in Bund yields.

 

In the US, plans to shrink the deficit have been shelved, awakening the bond vigilantes (more of this later). With debt interest costs rising daily and now dwarfing the annual defence budget, the President is focusing on growth as a way to improve the debt-to-GDP ratio.  The passing of President Trump’s “Big Beautiful Bill” is the next fiscal hurdle to be cleared.

 

Rise in long-dated bond yields - “Supersonic”

 

Yield curves had been too flat for too long, and this year the great ‘re-steepening’ gathered momentum. Short-dated bonds looked cheap, supported by a series of rate cuts from various central banks over the last six months, which helped push short-dated yields lower.

 

Long-dated bonds didn’t fare so well. A combination of higher fiscal spending (Germany), debt sustainability fears (UK) and ‘growing-not-shrinking’ deficits (US) all helped push long-dated yields higher. The most notable move in 40-year JGB yields, which rose by over 120bps in just over a month from their April low.

 

Investors are now demanding ever-higher yields to hold longer-maturity bonds – a rise in the term premium that shows few signs of stopping. The bond vigilantes are watching with interest.

 

Flows back into bonds – “Wonderwall” of money

 

After years of yields that were too low, followed by a period when they rose too quickly, bond allocations had been understandably low. The ‘great repricing’ of 2021-2023, though, gave fixed income assets back something they had been missing – income! 

 

Yield-hungry investors – insurance companies, pension funds, annuity providers – could now snap up government, investment grade or high yield bonds at 4.5%, 5.5% or 7.5% respectively, depending on their needs. As a result, flows into the asset class are healthier than for quite some time and have played a key role in supporting the corporate bond market.

 

Resilient credit spreads – “Bring it on down”

 

While government bonds have been in the eye of the storm this year, corporate bonds have proven more resilient. While not immune to the backdraft from the April tariff announcement, they are set to reach the mid-year point, having delivered an attractive total return. Given the plethora of challenges and curveballs thrown at the bond market, this feels quite an achievement. So how has this happened?

 

A big part of it is the investor flows back into bonds, with short-dated corporate bonds in particular seeing strong demand. The very active new issuance calendar has been met by strong demand, keeping spreads in check. As the more extreme economic scenarios have been discounted, investors have been snapping up corporate bonds at attractive yields during any short-lived bouts of weakness.

 

What lies ahead – “Don’t look back in anger”

 

While the past often helps explain the present, there are times when the factors driving the bond market don’t follow historical precedents – 2025 feels like one of them. Yes, we’ve had periods of rising fiscal spending and deficits before. We’ve also seen trade tariffs, geopolitical risk, and central banks walking a tightrope in the past. But rarely have we had all these factors at the same time.

 

One of the few constants in life – and investing – is change. That’s why, for the remainder of the year, investors need to look forward and not back, assessing incoming information rather than trying to predict the future. 

 

If the first half of 2025 has taught us anything, it’s to expect more twists and turns in the months ahead. Therefore, active risk management and flexibility will be essential.

 

 In short, you’ve got to “Roll with it”.

 

Click here to read and download Aegon AM's Global Fixed Income Mid-Year Outlook.

 

 

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Author

Colin Finlayson, CFA
Portfolio Manager

Colin Finlayson, portfolio manager, is a member of the global rates and multi-sector portfolio management teams.

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