Introduction

The first half of 2025 brought major shifts across capital markets as the Trump administration enacted sweeping changes to trade, tax, and immigration policies.

Elevated tariffs, geopolitical volatility, inflation concerns, and hints of additional White House Administration policy changes have tested investors and policymakers alike.

Meanwhile, the Fed has taken a cautious “wait and see” approach as it evaluates the downstream effects on employment and price stability.

The following summary outlines the year’s key developments across fixed-income markets and commercial real estate, and assesses where we stand heading into the second half of the year.

Wading into optimism: markets poised to rally

The year began with a new White House administration and a Federal Reserve signaling patience after cutting rates by 100 basis points in late 2024. The labor market remained solid, with steady job growth and unemployment steady at 4.1%. Early optimism in capital markets grew as investors anticipated lower interest rates and stronger economic fundamentals.

Fixed-income traders and real estate strategists expressed bullish sentiment at the January CREFC conference, highlighting improving supply-demand dynamics, especially in industrial and multifamily sectors. This positive momentum supported tight credit spreads and recovering Agency CMBS volumes, setting a promising tone for 2025’s early months.

“Liberation Day” tariff tantrums

Trade and fiscal policy uncertainty ramped up early in 2025 as the new administration signaled a focus on restoring the balance of trade through tariffs. The Federal Reserve Chairman Jerome Powell stated that the Fed does “not need to be in a hurry to adjust our policy stance,” shifting market focus to political developments to trade policy and tariffs.

On April 2, the Trump Administration announced sweeping “Liberation Day” reciprocal tariffs, including a broad 10% tariff on nearly all imports. This shocked markets and triggered sharp volatility. Treasury yields jumped nearly 50 basis points within days, as experts warned that these tariff rates were the highest in a century and posed upside risks to inflation and downside risks to growth.

Evolving tariff landscape

Approximately one week after the “Liberation Day” announcement, the administration implemented a 90-day delay on new tariffs that offered businesses brief relief; however, the unpredictability of trade policy continued. While recent progress, like a U.S.-China trade framework, tempered fears, tariffs remain elevated and legal challenges could reshape enforcement.

Economists warn that pricing pressures may still pass to consumers, with The Budget Lab at Yale estimating an effective tariff rate of 17.8%, the highest since 1934. Although retaliation has been limited, growth projections have softened, and investors remain cautiously optimistic that broader de-escalation may follow.

Outlook from the Federal Reserve

Despite pressure from markets and the new administration to begin rate cuts, the Fed has held steady, citing solid economic fundamentals and ongoing uncertainty around trade, tax, immigration, and tariffs.

Growth in private domestic spending and a stable labor market have given policymakers room to be patient, though inflation remains a challenge. The June FOMC meeting showed officials still expect to lower rates slightly this year, but policymakers remain cautious and the decisions remain data-dependent. While near-term inflation expectations have risen, long-run forecasts remain anchored near the Fed’s 2% goal. As Fed Chairman Jerome Powell noted, high uncertainty has left officials cautious but open to adjustment as more data emerges.

Bond market monitors creeping fiscal and credit risks

Congress passed the “One Big Beautiful Bill Act,” a sweeping tax-and-spending bill that has fueled concerns over the U.S. debt load, prompting Moody’s to join S&P and Fitch in downgrading U.S. credit ratings. As investors reassess long-term risk, rising term premiums and elevated 10-year yields reflect mounting pressure in the bond market.

Agency and corporate spreads hold firm

Despite recent downgrades of U.S. debt and the GSEs, Agency and corporate credit spreads have held firm. Markets largely shrugged off the latest Moody’s downgrade, and investor focus has shifted to the uncertain future of GSE conservatorship.

Speculation around Fannie and Freddie’s privatization raises questions about their implicit government backing and future regulatory treatment, but no formal changes are expected until at least 2026. Meanwhile, investors are watching Agency spreads, corporate bond comparisons, supply forecasts, and geopolitical risks through year-end. Despite these headwinds, spreads remain historically tight, with Fannie Mae DUS/MBS pricing at some of the narrowest levels to Treasuries since 2019, mirrored by strong performance in investment-grade corporate bonds.

Agency supply surges while potential risks linger

Both Fannie Mae and Freddie Mac are targeting their regulator-set purchase caps of $73 billion for 2025, with both agencies outpacing 2024 year-to-date.

Despite favorable issuance and spreads, risks remain. Recent geopolitical conflicts in the Middle East and ongoing tensions in Eastern Europe have unsettled capital markets. Additionally, uncertainty around the potential resumption of reciprocal tariffs adds to market volatility. These factors continue to create challenges for predicting Agency CMBS spread movements in the near term.

Marching forward

Investment bank forecasts and market outlook

Investment bank forecasts and Fed projections are expected to evolve as the economic effects of the August tariff resumption become clearer. Financial market pundits currently forecast two Fed Funds rate cuts this year, likely between September and December, aligning with the Fed’s own outlook.

At this juncture, institutional banks show greater forecasting confidence in 2026, expecting Treasury yields to remain rangebound through late 2025 before declining next year as rate cuts take hold.
In this uncertain environment, demand for investment-grade assets like Agency CMBS is expected to grow due to their lower credit risk and favorable regulatory capital treatment.

Despite near-term tariff disruptions, economists and Fed policymakers generally anticipate slowing growth and inflationary bumps, setting the stage for lower Treasury yields over the medium term.

Conclusion

Through mid-2025, the 10-year Treasury yield averaged around 4.40%, with volatility peaking around “Liberation Day” but staying below January highs. Despite frequent tariff headlines, markets have largely held steady, reflecting investor adaptation to a higher tariff environment.

Agency and Non-agency CMBS market issuance and investor demand remain strong, with a notable 50.7% increase in offering volumes year-to-date and with credit spreads near historical tights. As reciprocal tariffs gain clarity, reduced uncertainty may lower volatility and boost confidence. With Agency CMBS volumes rebounding and spreads tightening compared to last year, forecasters expect Treasury yields to decline, unemployment to stay low, and inflation to ease, supporting a positive long-term economic outlook.