August 2025 Monthly Commentary

MARKET OVERVIEW:

August brought solid performance in both equity and fixed income markets as a few macro themes unfolded. On the very first trading day of the month, non-farm payrolls data painted a very different picture than investors have been accustomed to this summer. With a much lower than expected monthly figure, plus significant revisions to prior months, the employment data went from robust to slowing. Yields dropped and stocks rallied as markets anticipated future rate cuts from the Federal Reserve Bank at their upcoming September meeting and potentially beyond.

On August 22nd, Chairman Powell delivered a “dovish pivot” towards lowering rates at the annual Jackson Hole Central Bank Summit. Again, equity and bond prices moved sharply higher. The entire month wasn’t a straight line up, as markets digested plenty of cautious data points, including inflation, Putin/Trump meeting in Alaska, earnings warnings from some of the market leaders, and a political test to “Fed independence”.

EQUITY MARKETS PERFORMANCE:

U.S. equities delivered another solid performance month as only the utility sector posted negative performance last month. The S&P 500 Index jumped approximately +2.03% (total return) for the month. The Dow Jones Industrial Average rose 3.43% as both materials and health care (including a big rebound in UnitedHealth Care) rose more than 5%. The tech-heavy Nasdaq Composite rose only 1.65% as returns in some of the “Mega caps” diverged. Apple delivered excellent results with plans to invest domestically. Some of the most anticipated earnings included some warnings signs. In the beginning of the month, Amazon delivered on earnings yet guided lower for future growth. During the last week of August, Nvidia was possibly the most anticipated data point before Labor Day weekend. Earnings were solid as usual, but investors focused on data center information, and the report failed to excite investors.

FIXED INCOME MARKETS PERFORMANCE:

The fixed income markets saw strong performance, especially in short and intermediate bonds. Despite being overshadowed by another excellent year in risk markets, many fixed income sectors are enjoying positive price action and income this year. Catalysts including the lower employment data, and the Jackson Hole speech, drove the yield curve lower and steeper. US two-year Treasury notes dropped 34 basis points from 3.96% on July 31st, to 3.62% at month end. US five-year Treasury notes dropped 28 basis points to yield 3.70. Only the 30-year Treasury sector saw little movement over the period, as bonds rose 3 basis points to yield 4.93% at month end.

The current steepening of the yield curve is occurring for a few reasons. While the shorter end of the curve is taking direction from the FOMC and economic data, the long maturity sectors continue to grapple with market specific drivers. In August, new supply in both 10-year Treasuries and 30-year Treasuries were met with tepid demand. Both auctions tailed signaling lower demand for longer dated bonds. US deficits clearly are affecting longer term bonds, as they are in other industrialized countries. Secondly, inflation data remains sticky. While CPI was only a little “warmer” last month, PPI data jumped suggesting tariffs may be starting to show up in industry pricing. PCE data (the FOMC preferred measure) came in mostly in-line, but still slightly higher than a “comfort zone”. Finally, last month we witnessed some pressure on longer term bonds as President Trump moved to fire Fed Governor Lisa Cook. Longer bonds saw pressure as the move was perceived as political, to weaken the independence of the Federal Reserve, and insert new a new Governor that would be more aligned with the administration.

The US bond aggregate rose 1.20% while intermediate investment grade rose slightly more. Quality slightly outperformed lower rated bonds and the 5–10-year sector rose the most. Despite higher risk markets, government bonds outperformed corporate debt. Corporate bonds in the investment grade space did see risk premium spreads at their lowest level since 1998, possibly driving investors to look at other market segments. The US MBS market had a stand-out performance up 1.61%. US high yield rose 1.25%, and hard currency EM bonds rose 1.52%.

The Bloomberg municipal bond aggregate rose +0.87%, and intermediate tax-free bonds slightly underperformed longer duration municipal bonds. Longer duration municipal bonds have been underperforming, which has made their ratios versus corresponding treasuries quite attractive. The tax-free sector saw strong reinvestment of maturities into a good deal of new supply. The State of New Jersey saw a credit upgrade.

Bond traders will be taking their direction from the outcome of the September Fed meeting, and whether markets will get a series of rate cuts, or possibly just one. August employment will be a sensitive release given the large changes to prior months. Inflation data will continue to drive the shape of the yield curve. In addition, US politics has continued to serve as a catalyst for macro markets, whether it's Federal Reserve involvement, new tariff announcements, chip investments and company specific deals.

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Supporting footnotes from Bloomberg: