Fixed Income and Foreign Equities — The Quiet Strength in Global Diversification

In a year defined by volatility and policy surprises, two asset classes quietly delivered consistent returns and stability thus far in 2025: high-quality fixed income and international equities. While headlines focused on tariffs and tech, these segments reminded investors of the enduring value of global diversification and disciplined portfolio construction.

Fixed Income Finds Its Footing

After years of low yields, fixed income has reemerged as a compelling component of diversified portfolios. The Bloomberg US Aggregate Bond Index (“AGG”) now yields approximately 4.5% as June 2025, a significant improvement from the ~2% levels seen in early 2022. This increase is largely due to the Federal Reserve’s aggressive rate hikes, which have reset the landscape for bond investors.

What makes this environment particularly attractive is the balance between yield and risk. With inflation in the mid-2% range year-over-year, investors in high-quality bonds have been able to grow their purchasing power — something that was elusive in prior years. Even cash, yielding ~4%¹, offers short-term appeal, though we expect those rates to decline as the Fed begins to ease.

While there’s uncertainty around the exact path forward for interest rates, a sensitivity analysis measuring the AGG’s expected return relative to interest rate changes (as reflected by the 10-Year Treasury yield) helps convey why we feel high quality bonds offer an attractive outlook.

• If rates stay flat: implies a +4.5% expected return
• If rates fall by 1%: implies a +10% expected return
• If rates rise by 1%: implies a -1% expected return

This range illustrates why fixed income is once again a valuable buffer in portfolios — especially in uncertain environments.

Municipal Bonds: A Quiet Opportunity

Municipal bonds have also shown promise, despite underperforming taxable bonds this year. Selling pressure from retail investors and uncertainty around tax code changes have created attractive entry points. Intermediate municipal bonds now offer a tax-equivalent yield of nearly 7%², making them a compelling option for taxable accounts.

The Resurgence of Foreign Equities: Why Global Diversification Matters

While U.S. equities posted modest gains (S&P 500 +6% YTD), international markets stole the spotlight. Non-U.S. equities (MSCI ACWI ex US) surged +18%, driven by a weaker dollar and improving sentiment abroad. Europe, in particular, benefited from expectations of more supportive fiscal and monetary policies, with the MSCI Europe Index up +23%.

This outperformance highlights the importance of maintaining a global perspective. SCS has long advocated for international exposure, recognizing that opportunities often arise when sentiment shifts.

Investors often gravitate toward familiar markets, but concentration can be risky. Regional performance ebbs and flows, and timing those shifts is notoriously difficult. By maintaining exposure across geographies and styles, investors can build resilience and capture upside when sentiment turns.

This year’s results reinforce that lesson, while U.S. markets faced headwinds from policy uncertainty and elevated valuations, foreign markets benefited from more favorable conditions. A globally diversified portfolio not only reduces risk — it expands opportunity.

A Purposeful Approach to Investing

At SCS, we view diversification not just as a strategy, but as a reflection of thoughtful stewardship. Just as families benefit from embracing diverse perspectives and values, portfolios benefit from exposure to a purposeful array of assets and ideas.

In a world that’s constantly changing, the quiet strength of fixed income and foreign equities can / has offered stability, growth, and a reminder that attractive opportunities lie beyond the headlines.