While yields remained a prime feature for bonds in 2024, the Fed's monetary policy easing didn't do favors for price appreciation. However, bond investors could reap those rewards if they focus on the long-term horizon.
The S&P 500's gain of 24% rewarded investors heavily skewed towards equities in 2024, but no so for bonds. Even gold bested the S&P 500 with a gain of 27% the past year while bonds tracked significantly lower than both.
“Most fixed-income asset classes are on track to produce low-single-digit returns for the year, far underperforming equity-market returns,” said Brian Rehling, head of global fixed-income strategy at the Wells Fargo Investment Institute, in a MarketWatch article.
Mentioned in the article was the corner of bonds that did outperform, which was riskier high-yield debt issues. With a new presidential administration set to take the helm of the U.S. economy in 2025, it's important to refocus on the fundamentals of bonds, which is volatility control.
“It is worth remembering why fixed-income investments are typically part of most diversified investment portfolios,” Rehling added, noting the role of bonds in diversifying a core portfolio.
This is where investors looking to add bonds have to look beyond their income benefits. As in the case of a 60/40 stock-bond portfolio, having that 40% allocation to bonds can help when the stock market experiences heavy market fluctuations.
“While risk assets saw the best performance in 2024, the future is not certain, and abandoning fixed-income investments could lead to underperformance in a year in which risk assets struggle,” Rehling said further.
2 Options for Bond Exposure in 2025
With an eye on the long-term benefits of bonds, investors can get core exposure with one fund: the Vanguard Total Bond Market Index Fund ETF Shares (BND). The fund offers exposure to a wide spectrum of public, investment-grade, taxable, fixed income securities, as well as mortgage- and asset-backed securities in the U.S. The fund adds more diversification via exposure to government, corporate, and international-dollar-denominated bonds.
Speaking of the long-term horizon, investors who want to stretch out their exposure to the farther end of the yield curve, but mitigate credit risks can stick to long-term Treasuries. More specifically, they should consider the Vanguard Long-Term Treasury ETF (VGLT). It tracks the performance of a market-weighted Treasury index with a long-term dollar-weighted average maturity. That index includes fixed income securities issued by the U.S. Treasury (not including inflation-protected bonds) with maturities greater than 10 years.
For more news, information, and strategy, visit the Fixed Income Channel.
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