Factset Research just provided some illuminating color commentary on the state of the economy.

After reviewing second quarter conference call transcripts from nearly all S&P 500 companies over the past few weeks, it found the word “recession” appearing on just 16 calls.

For context, a similar search of first quarter transcripts conducted a few months ago found 124 mentions. At that point, roughly one-in-four businesses raised the possibility of a slowdown on the horizon. Now, it’s closer to one-in-thirty.

The steep 87% decline (from 124 to 16) in usage of the term recession is a clear indication that tariff-related fears have been melting away.

In fact, one of the recent instances was Home Depot (NYSE: HD) CEO Edward Decker simply calling attention to this trend by saying we’ve gone from “a near-certain recession in April” to an environment where expectations are “way down.”

Meanwhile, as recession chatter fades, economic growth forecasts have brightened considerably. According to recent polling, the percentage of CEOs anticipating at least flat or better GDP expansion over the next six months has more than doubled from 38% in April to 73% today.

The sunnier economic forecast is clearly reflected in the S&P 500, which has bounced more than 30% since April to new record highs.

Most of you probably already knew that. Financial pundits dutifully report almost every uptick (or down) in the major indexes on an hourly basis. The bond markets? Not so much.

But fixed income groups also stand to benefit. Analysts are now targeting double-digit earnings growth among S&P firms this year. And healthier cash flows make it much easier for leveraged companies to service their debt. Even before this turnaround, credit fundamentals had already been strengthening.

Fitch, for example, reported zero defaults among investment-grade rated corporate bonds in 2024, with the credit rating downgrade-to-upgrade ratio dropping to 0.9 – meaning there were more positive revisions than negative.

That trend has accelerated since then. According to S&P, U.S. corporate credit upgrades outnumbered downgrades by a two-to-one margin last quarter. That’s good news for anyone who holds corporate IOU certificates.

Of course, the bond world is also closely attuned to Jerome Powell and his cohorts over at the Federal Reserve… parsing every word for rate policy clues. Following his latest comments a few days ago, market observers are cheering the strong possibility of a rate cut next month – futures trading currently points to a 90% probability.

The unexpectedly dovish speech immediately sent Treasury yields tumbling – and prices moving in the opposite direction.

You might be familiar with the term duration, a measure of a bond’s sensitivity to interest rates. Without getting into the math, a duration of say, 5, simply means that a 1% decline in prevailing interest rates will drive the price of an existing bond higher by 5%. In general, the longer end of the yield curve (securities with 20 to 30-year maturities) is more sensitive and thus has higher durations.

With the benchmark Fed Funds rate still hovering between 4.25% and 4.50%, we could easily see 100 basis points of loosening in the near-term… particularly if the labor market continues to soften.

Let’s not forget bonds are also coveted for their low (and often negative) correlation with equities. That’s a fancy way of saying that when one group zigs, the other tends to zag. So when stocks tank, bonds can help cushion the jarring impact.

At least, that’s what they teach in Finance 101. And normally it’s true. But that wasn’t the case a few years ago, when a perfect storm barreled into this usually placid financial enclave, bringing extreme conditions that few have seen in their lifetimes – at least not anyone born after 1926.

To combat runaway inflation in early 2022, the Fed aggressively raised interest rates seven times in a short 12-month span. The influential Fed funds rate screamed from 0.08% (a historic low) to 4.33% (a 15-year high).

Incidentally, we’re still there today (even though core inflation has largely been corralled).

Remember, interest rates and bond prices have an inverse relationship. So that rate tightening triggered a painful bond market collapse. Taxable investment-grade bonds (as measured by the Bloomberg U.S. Aggregate Bond Index) suffered a historic 13% drop in 2022, the steepest decline in about half a century.

Preferred stocks (which behave like bonds) also felt the sting, tumbling about 18%. And long-term Treasury bonds, the most sensitive to rate fluctuations, lost a staggering 24%.

About half of those declines were recouped over the next 24 months, but most bond funds are still underwater on a trailing five-year basis –highly unusual.

It has only been a few months since tariff jitters rattled the credit markets with a reinforcing jolt that widened yield spreads on investment-grade bonds to more than 100 basis points over comparable Treasuries. Yield spreads in the riskier high-yield (aka junk) bond sector spiked to 400 basis points – a 17-month high.

There has been some settling since then. But the hungrier risk appetite we’ve been seeing could narrow spreads a bit more, sweetening already generous coupon payments.

As it stands, high-grade corporate bonds are currently yielding between 5.0% and 5.2% — about what junk bonds offer at some points in the cycle.

If you’re looking for more fixed income exposure, there are endless options. I’m a fan of the Fidelity Total Bond (NYSE: FBND).

Launched in 2014, FBND is essentially a mutual fund wrapped inside of an exchange-traded fund, a hybrid structure combining the best attributes of both vehicles.

As with most ETFs, the expense ratio is thin (0.36%), the portfolio composition is transparent and clearly defined, and turnover is kept to a minimum to promote tax efficiency. But this is no rigid index-hugger. Fidelity’s deep bench of research analysts is fully brought to bear in support of active portfolio managers who seek to add value and deliver premium risk-adjusted performance.

The fund starts with the same basic universe as its peer group: the Bloomberg U.S. Aggregate Bond Index, a broad measure of government, corporate and mortgage-backed bonds. But rather than simply mirror the static index like its ETF brethren, FBND has the flexibility to bend and twist in response to changing market and macroeconomic conditions.

At least 80% of the fund’s assets must reside in investment-grade debt, which means a maximum of 20% in lower-rated securities. But within that basic framework, individual security selection, tactical portfolio duration, credit quality shifts, and larger strategic asset allocation decisions are all left to management’s discretion.

With an eye on both risk and opportunity, Fidelity closely scrutinizes inflation data, credit quality, global monetary policy, and myriad other factors. A weakening dollar, for example, could coax a pivot into emerging market bonds denominated in local currencies. Rising defaults and economic uncertainty might lead to an emphasis on defensive AA and AAA-rated securities.

The $19 billion asset base covers a lot of ground at 4,000+ positions. The average coupon is 4.3%, but most of these bonds yield considerably more thanks to their discounted prices. With an average duration of 6.0, the portfolio is currently skewed towards the intermediate/long range of the spectrum.

Interest income generated by these holdings is disbursed monthly. Based on the latest distribution, the fund is now dishing out a healthy yield of 4.6% and boasts a 30-day SEC Yield of 4.8%. It has also handily outrun more than 80% of its category rivals over the past decade, earning “top-flight” honors from Morningstar.