Interest Rates

The One Big Beautiful Bill Act (OBBB) has two notable impacts on front-end U.S. rates. First, the OBBB increased the debt ceiling by $5 Trillion, removing the threat of technical default on certain Treasury securities. While many factors (e.g., fiscal and tax policy, prevailing interest rates) impact the Treasury’s borrowing needs under the debt ceiling, early estimates (with a wide margin of error) suggest the debt ceiling won’t be an issue for markets again for at least a couple of years. Strictly from the lens of money market functioning, this is a welcome development.

Second, Treasury Bill issuance will now increase markedly this quarter. The Treasury had been operating under extraordinary measures, meaning less bill issuance to remain under the ceiling. However, this leaves the Treasury with less cash-on-hand than it typically targets. The Treasury General Account (TGA) fell to $313 Billion by early July. Simply returning the TGA to a previously stated target of $850 Billion by the end of 3Q implies more than half a trillion in net T-Bill issuance in short order. While this uptick may cause some minor, temporary indigestion in the money markets, we don’t anticipate large-scale disruptions and suspect higher yields will be met with demand.

— Dan LaRocco, Head of U.S. Liquidity, Global Fixed Income

• The OBBB increased the debt ceiling by $5 Trillion, removing the near-term threat of technical default.
  
  
• Treasury Bill issuance will now increase substantially this quarter.
  
  
• While this uptick may cause some minor, temporary indigestion in the market, we don’t anticipate large-scale disruptions.

Credit Markets

Risk assets continued to rally in June despite rising geopolitical tensions. Credit markets pushed higher. Spread tightening, declining Treasury yields and coupon income helped produce the highest monthly return for the high yield market in nearly a year. With spreads back to the low end of the year-to-date range, the amount of new issuance for June has been no surprise. With $37 billion pricing, it has been the busiest month since September.

The amount of senior secured bonds as a percentage of the high yield index is at a record high 35%, which has contributed to structurally tighter spreads overall. The average basis of secured and unsecured bonds are about 180 basis points (bps) currently. In addition, senior secured bonds have accounted for 42% of high yield issuance year-to-date following 45% in 2024 and a record high 59% in 2023. Given these changes in the composition of the high yield market, fundamentals continue to hold in well as the high yield default rate is at 1.4% as of June versus the long-term average of 3.4%. This has helped support current valuations.

— Ben McCubbin, Co-Head of High Yield, Global Fixed Income

— Sau Mui, Co-Head of High Yield, Global Fixed Income

• In June, high yield produced its highest monthly return in nearly a year.
  
  
• Senior secured bonds now make up 35% of the high yield index. This is a record proportion.
  
  
• With support from composition changes, fundamentals are healthy and supporting current valuations.
  

Equities

Markets rallied in June to put a bow on the best quarter since Q4 of 2023. Strength was global with U.S. Equities up 11.4%, Developed ex-U.S. up 12.1%, and Emerging Markets up 12.0%. The quarter resembled 2024 in many ways with the Mag 7 leading the way – outside of Apple – and cyclicals outpacing defensives by 17.1%. Breadth was narrow with less than 30% of stocks outperforming the benchmark. July began with renewed tariff concern even as the July 9 tariff deadline was temporarily pushed back. Tariff impacts will continue to be a focus as quarterly earnings kick off in mid-July. In Q1, earnings beats were slightly above historical norms with only a small number of companies pulling or lowering guidance. We expect that to be the case again in Q2. Earnings growth is expected to be around 6% year-over-year in Q2.

Fundamentals remain strong in the U.S., even with growth expectations having declined throughout the year. However, with valuations in the U.S. near recent highs, especially in the growth segment of the market, we see better risk-reward outside of the U.S. We therefore maintain a neutral position in U.S. Equities and an overweight to Developed ex-U.S. Equities.

— Jordan Dekhayser, Head of Equity Client Portfolio Management

• Markets continued rallying in June, with investors ignoring the adage of “sell in May and go away”.
  
  
• Narrow breadth in the second quarter resembled the market environment in 2024.
  
  
• Fundamentals and valuations in the U.S. are roughly balanced. We remain equal-weight U.S. Equities, with a preference for developed ex-U.S. markets.

Real Assets

In March, OPEC+ began to reverse policy and announced monthly increases in crude production. These announcements to hike supply shifted investor focus back to oil market supply/demand fundamentals. The moves signaled a strategic shift to the normalization of spare capacity and inventories and a reclamation of lost market share. Last week, OPEC+ announced a 0.55 million barrel per day increase in required crude production for August, which was above consensus expectations. To justify the increase in production, OPEC+ released a statement citing a “steady global economic outlook and healthy market fundamentals, as reflected in the low oil inventories”, but the full rationale remains ambiguous. Market focus now turns to the August announcement of September production. For now, fundamental supply and demand metrics appear healthy and resilient global demand has kept crude pricing rangebound.

Investing in commodities and global natural resource equities can provide protection against geopolitical risks and unanticipated inflation. We remain equal-weight natural resource equities relative to its strategic weight, and have a stronger preference for listed infrastructure.

— Jim Hardman, Head of Real Assets, Multi-Manager Solutions

• OPEC+ has begun to unwind output cuts and resume monthly increases in planned production.
  
  
• The market has a renewed focus on supply and demand fundamentals and resilient global demand has kept pricing rangebound
  
  
• We reaffirmed our equal-weight positioning in natural resource equities.