Mutual Funds

President Trump initiated a trade war to open the second quarter of 2025, announcing steep reciprocal tariffs affecting all US trading partners. Markets plunged and recovered as implementation deadlines were extended and deals with key trading partners were negotiated. The economy muddled through on a softening labor market and weaker growth prospects.

The Federal Reserve (Fed) left the federal funds target rate unchanged at 4.25% - 4.50% at each of its May and June meetings. Personal Consumption Expenditures (PCE) inflation continues to stabilize and drift down to the 2.2%-2.3% level, leaving the Fed room to maneuver as it waits to see the impact of finalized tariffs on employment and inflation. Treasury futures are projecting two further rate cuts by year-end.

For the quarter, Treasury yields declined for short maturities (1 – 5 year) and rose for longer maturities (10 – 30 year). Forecasts for more Fed rate cuts helped put downward pressure on short Treasury yields and Federal deficit concerns put upward pressure on long yields. The yield on the five-year Treasury ended sixteen basis points lower at 3.80%. For the second quarter, the Commerce Short Term Government Fund’s return of 1.24% underperformed the Bloomberg 1-5 Year Government Index return of 1.38%. The Fund’s shorter duration relative to the benchmark detracted from performance. The fund’s exposure to agency debentures contributed to performance. 

A tumultuous second quarter saw the bond market decline immediately following the Liberation Day tariff announcements before recovering by quarter’s end on growing clarity of the tariffs. Definitive trade deals with key partners are expected imminently. Consensus is for a blended tariff rate of around 15% to subtract roughly 1% from US and global GDP over the next four to six quarters. Economic forecasts project full year real GDP for 2025 to be 1.5% with a 35% probability of recession within a year.