Insurance Insights: May 2025

Ben Riley, CFA- Head of Insurance
Taylor Davis - Insurance Relationship Manager
Jeff DeVack, CFA - Portfolio Specialist

Global Yield Outlook

Early April U.S. Treasury Market dysfunction has largely abated for now— Elevated concerns around U.S. Treasury market functioning that had some connection to a paralysis of certain hedge funds who, due to a spike in equity market volatility, had to “pause” in their Treasury market making role has abated for now. As a result, Supplementary Leverage Ratio (SLR) reform that would allow U.S. banks to be more actively involved in U.S. Treasury market functioning is an area that may be part of the Budget Reconciliation legislation that is expected to pass before Congress’s August recess.

Debt Ceiling Reform could propel more U.S. Treasury “coupon” issuance (and higher intermediate and longer maturity yields) at a time of less foreign sponsorship—Some form of “debt ceiling” resolution is also expected in the above referenced pending U.S. legislation. Once resolved, our Insurance Team expects more U.S. Treasury “coupon” supply in the market, as the U.S. government has largely been funding its elevated deficit spending trend with short maturity T-Bills since the late fall of 2023. This dynamic will be occurring as foreign bond ownership of U.S. Treasuries continues to contract just as stimulative fiscal policy looms. Through this lens, U.S. yields appear poised to be range bound near term, but poised to move materially higher than current domestic rate levels next year.

Still, two 25bps rate cuts from the Fed before year end even though inflation is headed higher…—Counterintuitively, while we believe that U.S. Treasury rates out the curve are poised to move higher next year, we also believe that the current level of domestic monetary policy is restrictive and needs to be proactively reduced. This consideration gains importance as the U.S. economy is slowing amid a regime of higher global tariffs. And while the worst fears about tariff levies have been relieved, the reality remains that U.S. tariffs will fall in a range of 15% to 20% when the dust settles on trade negotiations which is markedly higher than the 2.5% tariff level that existed when the year began. This phenomenon is likely to impact domestic inflation which we expect to potentially rise as much as a full percentage point from current levels into next year. This dynamic also helps reinforce the additional expectation for higher intermediate and longer U.S. Treasury yield levels next year referenced above.

While near term inflationary for the U.S., domestically driven elevated tariff policy is deflationary for many other parts of the world—Elevated tariffs are expected to slow the global economy which creates negative price pressures for export driven economies. 

Additional Information Relating to The Market Indices on the Previous Page
Market indices shown on previous page represent the following:
Global HY: Bloomberg Global High Yield Bond Index USD-Hedged; US HY: Bloomberg US Corporate High Yield Bond Index; Euro HY: Bloomberg Pan- European High Yield Bond Index USD-Hedged; Asia HY: Bloomberg Asia USD High Yield Bond Index; Bank Loans: J.P. Morgan Leverage Loan Index; EM Sovereigns (USD): J.P. Morgan EMBI Global Diversified Index; EM Corporates: J.P. Morgan CEMBI Broad Diversified Index; Global IG: Bloomberg Global Aggregate – Corporate Index USD-Hedged; US IG: Bloomberg US Corporate Bond Index; Euro IG: Bloomberg Pan European Aggregate Corporate Index USD-Hedged; Asia IG: Bloomberg Asia USD Investment Grade Bond Index USD-Hedged; CLO: J.P. Morgan CLO Post-Crisis Index; CMBS: Bloomberg US CMBS ERISA Eligible Index; ABS: Bloomberg US ABS Index; Agency MBS: Bloomberg US MBS Index; Taxable Munis: Bloomberg Taxable Muni US Agg Eligible Index; Global Aggregate: Bloomberg Global Aggregate Bond Index USD-Hedged; US Aggregate: Bloomberg US Aggregate Bond Index.

Yields for European credit indices and German bunds are hedged using the EUR 3-month implied yield and 3-month USD LIBOR. Source: Bloomberg.

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