As we move through the second half of 2025, markets continue to wrestle with conflicting forces. On one side, economic data shows resilience; on the other, persistent deficit spending and rising Treasury issuance are pressuring interest rates higher. LPL Research expects the 10-year Treasury yield to remain elevated, potentially ending the year in the 4.0% to 4.5% range. This is being driven in large part by America’s ballooning debt, which now exceeds $36 trillion, and an increase in interest expenses that could make up nearly a quarter of the federal budget by 2054. Adding to the challenge, foreign investors are becoming less attracted to U.S. Treasuries due to higher rates in their home countries and costly currency hedging. Meanwhile, the Treasury yield curve remains relatively flat, offering little incentive to take on additional interest rate risk.

Still, there is potential for relief. If economic conditions begin to weaken—particularly in the labor market—the Federal Reserve may be compelled to cut interest rates more than currently expected. That shift could drive bond prices higher. Markets are currently pricing in fewer than two rate cuts this year, but any surprise deterioration in growth could change that outlook quickly.

Beyond bonds, the U.S. dollar has had a difficult start to the year, falling more than 10%—its worst first-half performance since 1973. Despite this, its position as the world’s reserve currency remains unchallenged, supported by deep liquidity, geopolitical strength, and global reliance on the U.S. financial system. In the commodities space, gold surged 26% in the first half of the year, buoyed by central bank demand and heightened geopolitical uncertainty. Copper also hit record highs, boosted by tariffs, Chinese industrial demand, and its essential role in powering AI-driven data centers.

The digital asset space also made headlines, with the recent passage of the GENIUS Act and the CLARITY Act marking a significant step toward crypto regulation. These new laws lay the groundwork for stablecoin integration and clarify oversight responsibilities between regulatory agencies. Bitcoin responded positively, breaking above $120,000 during the week.

From a portfolio standpoint, LPL Research continues to recommend a neutral stance on equities, noting that many positive developments are already reflected in current prices. The firm remains cautious given ongoing trade and policy uncertainties, preferring to maintain positions close to strategic benchmarks. Within fixed income, high-quality bonds remain attractive, particularly in the 3- to 5-year range, which still offers competitive yields without excessive interest rate risk. While the volatility we’ve seen in rates and currencies may persist, maintaining diversification and a disciplined, balanced approach remains key to navigating the rest of the year.

-Mark & Elise

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