While shorter-term bond yields have declined significantly since 2023, yields on longer-term bonds are trending higher as 2024 ends. Investors appear focused less on recent Federal Reserve (Fed) interest rate cuts, and more on continued solid economic data and inflation trends.
Investment strategists surveyed by Bankrate see the 10-year Treasury yield at 4.14 percent at the end of December 2025. That's up from the third-quarter 2024 prediction of 3.53 percent, but still slightly under 4.53 percent, the current trailing-12-month yield of the 10-year Treasury.
There is every reason to believe that there will be some spread widening as the pace of activity and issuance accelerates in 2025. High yield has been robust in part due to the low level of bankruptcy filings in this stable economy. Bonds for general corporate purposes dominated the calendar.
2025 Bond Market Outlook: Yields Range-Bound but Volatile. Sticky inflation, healthy economy could add up to a back-and-forth bond market. For 2025, bond investors might want to make themselves comfortable with where yields have been in 2024.
While it may be a great time to buy, hold, and ladder bonds, the outlook is also bright for investors in funds that manage bonds with an eye to making money as prices rise. Funds offer a way for investors with fewer assets to get exposure to bonds even if they cannot afford to build a ladder of individual bonds.
Bonds can perform well in a recession as investors tend to flock to bonds rather than stocks in times of economic downturns. This is because stocks are riskier as they are more volatile when markets are not doing well.
The future value formula is FV=PV*(1+r)^n, where PV is the present value of the investment, r is the annual interest rate, and n is the number of years the money is invested.
Vanguard's return expectations for US aggregate bonds are slightly lower than they were a year ago: a range of 4.3%-5.3% today versus 4.8%-5.8% in 2023.
Generally speaking, for every 1 percentage-point change in interest rates, a bond will rise or fall in the opposite direction by an amount equal to its duration number.
Series EE savings bonds issued May 2024 through October 2024 will earn an annual fixed rate of 2.70% and Series I savings bonds will earn a composite rate of 4.28%, a portion of which is indexed to inflation every six months. The EE bond fixed rate applies to a bond's 20-year original maturity.
Global growth forecasts are largely unchanged from last quarter, with the pace of economic expansion in 2024 slowing moderately in 2025. Easing inflation, resilient consumers, and a broadening of central bank rate cuts underpin our expectations for a soft landing.
Vanguard's updated 10-year annualized return projections:
Global bonds, ex-U.S.: 4.3% - 5.3% U.S. bonds: 4.3% - 5.3% Global equities (ex-U.S., developed): 7.3% - 9.3% Global equities (emerging): 5.2% - 7.2%
The table on the right shows that bond prices often recover within 8 to 12 months. Unnerved investors that are selling their bond funds risk missing out when bond returns recover.
We expect: Another cut to the Fed's target for short-term rates on December 18, 2024, putting its policy rate at 4.25%–4.5% for year-end. We anticipate the Fed will reduce its rate target further in 2025 to a range of 3.75%–4%.
While lower-rated bonds have been strong performers in 2023, we think the market is going to be more discerning as we head into 2024. We expect higher quality bonds will be the best bond performers over the next year. We also think performance will be more dispersed than it has been.
If the federal funds rate hits a low of 3.75% to 4.0% in this cycle, which is what the market is currently discounting, then it wouldn't be surprising to see 10-year yields near 5% at some point in 2025 (4% plus 94 basis points = 4.94%).
Source: U.S. Department of the Treasury, Daily Treasury Par Yield Curve Rates, as of November 25, 2024. 3-month Treasuries peaked at 5.52% on June 17, 2024. 2-year Treasuries peaked at 4.98% on April 10, 2024. 10-year Treasuries peaked at 4.70% on April 25, 2024.
On a short-term basis, falling interest rates can boost the value of bonds in a portfolio and rising rates may hurt their value. However, over the long term, rising interest rates can actually increase a bond portfolio's return as the money from maturing bonds is reinvested in bonds with higher yields.
Junk Bonds
Junk bonds are high-yield corporate bonds issued by companies with lower credit ratings. Because of their higher risk of default, they offer higher interest rates, potentially providing returns over 10%. During economic growth periods, the risk of default decreases, making junk bonds particularly attractive.
Bonds play an important role in your total portfolio as both a key source of stability, or ballast, as well as a source of income compared with stocks. But like stocks, it's important to make sure bonds are appropriately diversified to reduce risk.
Bonds are generally considered a less-risky complement to the volatility of stocks in an investment portfolio. U.S. Treasurys, and specifically Treasury bills and Treasury notes, are the benchmark for a nearly risk-free investment if held to maturity.
1. Saving Accounts. There's a good chance you already have a savings account. Like checking accounts, they're federally insured and are generally the simplest and safest place to keep cash in good times and bad.
In fact, today's bonds offer more yield for less risk. The back-up in yields since 2021 has allowed investors to earn significantly higher yields relative to the credit risk of a bond issuer. As a result, investors no longer need to rely on low-quality, high-risk bonds to earn attractive yields.