Navigating Credit Market Volatility: Thornburg Strategic Income Fund's Q2 2025 Strategy for Yield Resilience

The Thornburg Strategic Income Fund (TSIIX) has long been a standout in the fixed-income space, but its Q2 2025 performance underscores its adaptability in a post-rate-pause environment. As central banks paused rate hikes and markets grappled with fiscal uncertainty, the fund's active, multi-sector approach proved critical in balancing yield resilience with risk management. For investors navigating a landscape of shifting credit spreads and geopolitical tensions, TSIIX's playbook offers valuable lessons.

A Post-Rate-Pause Landscape: Stability and Opportunity

The Federal Reserve's decision to hold the federal funds rate steady at 4.25–4.50% through Q2 2025 created a mixed environment. While the 10-year Treasury yield hovered between 4.01% and 4.58%, the broader credit market saw a sharp April sell-off triggered by U.S. tariff announcements. Yet, by quarter-end, spreads had tightened to historically low levels, reflecting renewed investor confidence.

Thornburg's portfolio managers recognized this volatility as both a challenge and an opportunity. By de-risking early in the quarter—reducing high-yield exposure and shifting to Treasuries—they preserved capital during the April selloff. As markets stabilized, the fund pivoted to capitalize on narrowing spreads, increasing allocations to investment-grade corporate bonds and international credits. This agility highlights the fund's core strength: a bottom-up, fundamental-driven strategy that prioritizes relative value over rigid sector bets.

Strategic Rebalancing: From Defense to Offense

The fund's Q2 adjustments were methodical. After April's turbulence, it reduced Treasury holdings and extended duration into intermediate-term investment-grade corporate bonds, which outperformed the Bloomberg Aggregate Bond Index by 2.37%. Simultaneously, it expanded into international bonds and mortgage-backed securities, diversifying geographic and sector risk while accessing higher yields.

This “credit barbell” strategy—balancing high-quality, short-duration assets with select high-yield opportunities—allowed the fund to mitigate downside risks while capturing income. For instance, its exposure to international bonds benefited from divergent monetary policies in Europe and Asia, where central banks began easing rates earlier than their U.S. counterparts.

The Role of Active Credit Research

What sets TSIIX apart is its emphasis on active credit research. Portfolio managers Lon Erickson, Christian Hoffmann, and Ali Hassan leveraged deep fundamental analysis to identify undervalued credits, particularly in sectors like technology and infrastructure. This approach proved vital in a post-pause environment where macroeconomic signals were conflicting.

Consider the fund's pivot toward mortgage-backed securities (MBS). While many investors shied away from MBS due to refinancing risks, Thornburg's team identified newly issued, high-quality MBS with favorable prepayment protections. This niche focus generated a 4.1% return from the sector in Q2, outperforming the broader MBS market.

Positioning for the Road Ahead

As the U.S. faces fiscal headwinds—including the One Big Beautiful Bill Act's (OBBBA) projected $1.2 trillion deficit—Thornburg's strategy is increasingly relevant. The fund's modestly underweight duration position (relative to its benchmark) shields it from potential yield curve shifts, while its active credit selection ensures it can capitalize on dislocations in corporate and municipal bonds.

For investors, the fund's Q2 playbook offers a blueprint for navigating a post-pause world:
1. Diversify Across Geographies: Thornburg's international allocations provided a buffer against U.S. fiscal risks.
2. Prioritize Relative Value: The fund's focus on sectors with attractive risk-reward profiles (e.g., investment-grade corporates) mitigated exposure to overvalued assets.
3. Maintain Flexibility: By adjusting duration and credit quality in real time, the fund avoided being anchored to a single macroeconomic narrative.

Conclusion: A Resilient Model for Income Investors

Thornburg Strategic Income Fund's Q2 2025 performance demonstrates that yield resilience in a post-rate-pause environment requires more than passive duration management—it demands active, opportunistic strategies. With its 3-star Morningstar ratings and consistent outperformance in rising rate scenarios, TSIIX is well-positioned to deliver competitive risk-adjusted returns as markets navigate fiscal uncertainty and evolving trade dynamics. For income-focused investors, the fund's disciplined approach to credit selection and tactical rebalancing offers a compelling case for inclusion in a diversified portfolio.