In recent years, many investors have wondered why they should own bonds at all…especially during a brutal bond bear market when you could earn a risk-free 5% yield on cash in a savings account at an FDIC-insured bank.
But it’s time to get ready for a bond revival, says fixed-income strategist Robert M. Brinker. The Federal Reserve will continue to cut short-term interest rates as it pursues its dual mandate—to lower inflation while maintaining stable economic growth and low unemployment.
Remember the golden rule of bond investing: A bond’s yield typically moves in inverse proportion to its price. So when interest rate cuts cause bond yields to fall, the value of your existing bonds increase in price. That should help launch a new bull market in bonds.
Bottom Line Personal asked Brinker how bond investors can best position themselves this year, as well as what bond types to avoid and which government, municipal, high-yield and corporate bond funds to favor…
The bond market went nowhere most of last year, churning sideways as the Federal Reserve maintained short-term interest rates at a peak of 5.4%. Then, in mid-September, the Fed slashed rates by one-half percentage point, easing monetary policy for the first time in four years. Then cut them again in November. For 2025, I expect to see most areas of the bond market in positive territory thanks to significant shifts in four major factors…
My strategy for 2025…
While I expect most bond categories to do well in 2025 thanks to falling interest rates, one area looks much less appealing—long-term US Treasury bonds. With maturities of 10 years or longer, Treasury bonds are far more prone to price fluctuations than their shorter-maturity counterparts. They offer little value for the particular risks you’re taking on now. Reason: Long-term Treasury yields aren’t dictated by the Fed. They hinge on the bond market and investor sentiment about inflation and economic growth. That means unless we have a deep recession, you will not see sharply lower yields or sharply higher capital appreciation from long-term Treasuries. In fact, given the relative strength of the US economy now, long-term yields actually were rising toward the end of 2024. If inflation should happen to reignite, yields on long-term Treasuries could hit 5% or higher. That would cause the prices of these bonds to plummet.
Vanguard Short Term Corporate Bond ETF (VCSH) owns more than 2,600 high-quality corporate bonds from companies with strong balance sheets such as Anheuser-Busch InBev and Bank of America. The passively managed portfolio tracks the Bloomberg US 1-5 Year Corporate Bond Index and offers very low volatility. Recent yield: 4.63%. Performance: 2.3%.* Vanguard.com
Vanguard Intermediate-Term Corporate Bond ETF (VCIT). The sibling of VCSH holds 2,200 holdings with an average credit rating of BBB+ and follows the Bloomberg US 5-10 Year Corporate bond index. The fund has the potential for wider price swings than VCSH but compensates investors with higher yields and better long-term performance. Recent yield: 5.04%. Performance: 2.8%. Vanguard.com
Vanguard Intermediate-Term Tax-Exempt Fund (VWITX) owns an actively managed portfolio of about 1,800 municipal bonds with federally tax-free yields issued by well-managed states such as Texas and Virginia. The fund is conservatively run and has performed consistently well. For investors in the highest federal income tax bracket, the recent 3% yield translates into a 4.97% yield. Performance: 2.2%. Vanguard.com
DoubleLine Total Return Fund (DLTNX) is managed by Jeffrey Gundlach, regarded as one of the best fixed-income managers in the country. Gundlach specializes in MBSs and uses a “barbell” approach, mixing stable, low-yielding mortgage securities with riskier high-yielding ones that aren’t backed by federal agencies. Recent yield: 5.58%. 10-year performance: 1.7%. DoubleLine.com
Osterweis Strategic Income Fund (OSTIX) uses a unique strategy to provide high yields and reduce excessive volatility common to many junk-bond portfolios. Manager Carl Kaufman focuses on about 180 short-term bonds with maturities under two years and is willing to hold more than 20% of assets or more in cash if he can’t find attractive investments. Kaufman, who has run the fund for nearly a quarter century, excels at evaluating credit risk. None of his bond holdings have ever experienced a default. Recent yield: 6.1%. Performance: 4.5%. Osterweis.com
*All mutual fund performance is annualized for 10 years through November 8, 2024.