March Volatility: Implications for Fixed Income Investors

March kicked off with Treasury yields slipping modestly below their recent trading range, while the S&P 500 dipped below its 200-day moving average for the first time since 2023. Although the immediate trigger for this bump in volatility was the announcement of initial tariffs on Mexico, Canada, and China, early signs of a Treasury rally were already underway—driven by persistent softness in survey-based economic data we have discussed in prior months.

While U.S. markets were focused on trade tensions and their potential drag on growth, an entirely different story unfolded in Europe. German bond yields surged as markets reacted sharply to plans for a large-scale fiscal expansion. In just three trading days, Germany’s 10-year Bond yield jumped from 2.4% to nearly 3.0%, shaking up euro-denominated fixed income markets.

Following that dramatic first week, markets largely returned to a range bound pattern as the economic calendar offered few surprises. Inflation remained sticky, with core PCE rising 0.3% month-over-month and 2.8% year-over-year. The labor market also remained firm:

• Unemployment Rate: 4.1%
• Non-Farm Payrolls: +151k
• Initial Jobless Claims: Averaged ~220k throughout the month

As expected, the March 19 FOMC meeting delivered no change to the Fed Funds target rate, which remained at 4.25%–4.50%. However, investors looked to the Fed’s Summary of Economic Projections for guidance. The Fed revised its 2025 GDP outlook down from 2.1% to 1.7%, while increasing both its core inflation forecast (2.8% from 2.5%) and unemployment rate projection (4.4% from 4.3%). Curiously, despite these changes, the year-end Fed Funds rate forecast remained at 3.9%, adding to the market’s confusion.

Reference yield changes for the month:

• 5-year Treasury: 4.02% → 3.95%
• 5-year AAA muni: 2.63% → 2.93% (Taxable Equivalent Yield ~4.95%)
• 10-year Treasury: 4.21% → 4.21%
• 10-year AAA muni: 2.86% → 3.30% (Taxable Equivalent Yield ~5.57%)

Tax-exempt yields moved higher across the curve, primarily due to a combination of seasonal tax-bill payment selling, a pickup in new supply, and speculation around future tax policy changes. Meanwhile, taxable investment-grade bonds outperformed, with performance closely tied to specific underlying credit quality. Investors should consult their own tax advisor regarding their individual tax situation.

All yield figures represent gross market yields and do not reflect the impact of fees or expenses.

The wild swings seen in the final two days of March across fixed income, equities, and gold were just the early signs of more volatility ahead. Tariffs tend to act as external shocks to the economy that force repricing across asset classes. The immediate reaction was a typical flight-to-safety rally benefiting high quality fixed income. However, the longer-term market response and different asset class repricing’s—driven by potential trade negotiations, inflation, labor dynamics, and economic spillovers—will unfold over time.

Our taxable team’s view remains that—even when used as negotiating tools—tariffs and counter-tariffs are ultimately negative for both U.S. and global growth. The textbook view that tariffs are a one-time increase in price levels oversimplifies the reality. As we have seen, this is a prolonged process, often drawn out through months of negotiations and tit-for-tat escalations. Importantly, market consensus has pared down U.S. growth expectations. At the start of the year, the Street was looking for U.S. 2025 GDP growth around 2.5%; now it's closer to 1.5%. At this time, the Fed is on an indefinite holding pattern unless the labor market weakens noticeably.

Looking ahead, while we expect continued swings in both inflation and interest rates, we believe tax-exempt fixed income remains just as well positioned as taxables—particularly as the extension of the 2017 tax cuts works its way through Congress. Under a current policy baseline (vs. current law) scoring framework, extending the 2017 tax cuts would be treated more deficit-neutral, requiring fewer fiscal offsets. Additionally, any future insurance rate cuts by the Federal Reserve would create more tailwinds for taxable and tax exempt portfolios alike.

Taken together, recent volatility, trade policy friction, and shifting expectations for growth may create a more supportive environment for high-quality fixed income. In particular, we see value in both taxable and tax-exempt fixed income, as we believe these strategies serve as effective diversifiers to equities in uncertain times.