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.
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.
Our 10-year forecast for emerging markets equities stood at an annualized range of 5.2% to 7.2% as of a November 8, 2024, running of the Vanguard Capital Markets Model (VCMM). That's down from a range of 5.7% to 7.7% as of a June 30, 2024, running of the VCMM.
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.
He says, "Interest rates are now back to almost 30-year norms. Whether you want to build a portfolio with Treasury, municipal, investment-grade corporate, or high-yield bonds, you can get respectable yield and you could do well as rates plateau. You could do even better when interest rates head back down again."
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%
The firm is expecting better returns—albeit with higher volatility—from lower-quality bonds: a range of 5.3%-6.3% for US high-yield bonds and 5%-6% for emerging-markets sovereign bonds.
About Vanguard
Within the industry, Vanguard is a leader in offering passively managed mutual funds and ETFs. It is known for its: Stability.
Sources: Vanguard calculations, based on data from Bloomberg as of June 30, 2021, and June 30, 2024. Bond yields at midyear 2021 were a paltry 0.25% for the 2-year and 1.45% for the 10-year, compared with midyear 2024 yields of 4.71% for the 2-year and 4.36% for the 10-year.
Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.
First, they now offer positive real yield, which means that the income they generate is higher than the inflation rate. So, even after inflation, investors are technically making money by investing in bonds. That had not been the case for 2022 and 2023.
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.
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.
The good news is that Treasury bonds (T-bonds) are guaranteed by the U.S. government. They can be solid investments for those who are in or close to retirement as well as younger investors who seek a stable return.
The securities that underlie the funds are held by a custodian, not by Vanguard. Vanguard is paid by the funds to provide administration and other services. If Vanguard ever did go bankrupt, the funds would not be affected and would simply hire another firm to provide these services.
Vanguard is the king of low-cost investing, making it ideal for buy-and-hold investors and retirement savers. But active traders will find the broker falls short despite its $0 stock trading commission, due to the lack of a strong trading platform and small selection of research and data.
The Vanguard Wellesley Income Admiral, the Vanguard Tax-Managed Balanced Fund Admiral, and the Vanguard High-Yield Tax-Exempt Fund are all popular vanguard funds.
As of 6:50 AM ET, the yield on the 10-year note is rising two basis points (0.02%) to 4.78%, while the 30-year bond yield is unchanged at 4.95%. The yield on the two-year note, which is more sensitive to changes in monetary policy, is up three basis points (0.03%) to 4.41%.
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.
The bond market is caught between the Federal Reserve's plans to cut interest rates and the risk of higher inflation and federal debt levels. It looks like another bumpy ride is in store for fixed income investors in 2025, with a wide range of potential outcomes.
Investment advisers say now is a fine time for bonds. They are a good investment in 2024, experts say, for the same reasons they felt like a bad investment in 2022. That year, the Federal Reserve embarked on a dramatic campaign of interest-rate hikes in response to inflation, which reached a 40-year high.
Full-year 2024 GDP growth of around 2.30%, with growth remaining above 2.00% in 2025. Inflation (core PCE) rising to 2.90% by year-end because of challenging comparisons with year-earlier data but falling to 2.50% by the end of 2025. The unemployment rate increasing marginally in 2025 to around the mid-4.00% range.
As with other bond funds, one of the risks of the fund is that increases in interest rates may cause the price of the bonds in the portfolio to decrease—pricing the fund's net asset value (NAV) lower.