Not much change in the Q2 bond markets but plenty of volatility

Special to the Sarasota Herald Tribune

(July 21, 2025) The end of the second quarter of 2025 saw slight rises in the 10-year Treasury yield but slight lowering of yields in the 10-year AAA muni yield. When you look at the highs and lows for the various maturities of both tax-exempt munis and U.S. Treasuries you realize the volatility that buffeted both markets.

On the Treasury side we had plenty of volatility during the quarter, which came in the form of concern over tariffs (still with us). The market absorbed talk about 50% tariffs for some countries. Eventually, a 90-day moratorium was imposed. But in April this sent the bond market reeling between thoughts that tariffs would plunge the country into a recession or result in much higher inflation. Another example of the volatility: In the first full week of April we saw the 10-year Treasury move from a 4.10 to 3.90 almost overnight on fear of a slowdown and then rocket to an intraday high of almost 4.70 during that week on fears that the President would try to remove Jay Powell as Fed chair (he can’t do so, by law, and he backed off from this stance).

The 10-year AAA muni yield, which moved from a 3.26% to 3.20%, was also subjected to a lot of volatility. There was the continued concern (a holdover from first quarter) about the taxation of municipal bonds. We know there were concerns about taxation of munis in three different scenarios. At various times, there was Congressional discussion about taxing munis on forward issuance. Then discussions about taxing existing issuance as well, and finally discussion about imposition of a 28% cap on the benefit of tax exemption. (In other words, if you were in the 35% tax rate, you could only enjoy the benefit of federal tax exemption up to the level as if you were in the 28% bracket.)

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John R. Mousseau, CFA
Vice Chairman | Chief Investment Officer
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