The Bank of England (BoE) and European Central Bank (ECB) have cut interest rates again recently, continuing their cutting cycles.
The Federal Reserve (Fed) also cut rates towards the end of 2024, but decided to leave them unchanged in January.
The state of the economy in the US seems to be quite different to Europe. Growth for the US came in at around 2.8% for 2024, higher than the equivalent 0.9% for both the UK Euro area.
Expectations for 2025 are different too, with the BoE cutting its growth forecast for the UK in half from 1.5% to 0.75% recently. In Europe, the ECB has been quite clear that it expects growth to be weak this year.
This isn’t true for the US, which is expected to keep growing. Predictions there, are more difficult right now because no one knows the impact that Trump’s tariffs might have.
This article isn’t personal advice. If you’re not sure whether an investment is right for you, ask for financial advice. All investments and any income from them can fall as well as rise in value, so you could get back less than you invest. Yields are variable and not a reliable indicator of future income. Past performance also isn’t a guide to the future.
Bond yields continue to yo-yo
Interest rate cuts, sticky inflation, the unknown impact of tariffs and other Trump polices have meant markets continue to provide plenty of short-term ups and downs.
The yield on UK 10-year government bonds has been particularly volatile over the last few months.
At the start of November, it was around 4.45%, it fell to 4.22% in early December, rose to a peak of 4.89% in the middle of January, before falling back to 4.54% at the end of January. So, it ended up back where it started three months ago.
A frustrating journey for many bond investors, many of which invest in bonds as they’re happy to accept a lower return compared to shares, on the condition that the journey is smoother.
So, what’s next for bond markets in 2025?
More ups and downs. Probably.
There seems to be a consensus view that there will be further interest rate cuts in 2025, with markets pricing in around two cuts by each of the BoE, Fed and ECB.
Bond markets are very aware of this though, so these are likely already priced into bond yields.
It’s entirely possible yields will move around over 2025, but end up at similar levels to today come the end of the year. While the journey might not be ideal, the returns would still be positive in that scenario.
There’s also definitely potential for yields to fall though, especially with rates being on a downward trend, and economic growth in the UK being weak.
The biggest risk for negative performance would be an unexpected spike in inflation again. This could happen in the UK, with the BoE expecting inflation to nudge back up to around 3.7% later this year, before starting to fall again.
How have bonds performed over the last 12 months?
Different parts of the bond market have done better than others over the last year.
More risky bonds within the high yield category have provided the highest returns, while UK government bonds (gilts) have provided the lowest. This is largely because of the yields those bonds offer.
Companies with a higher risk of defaulting on their bond payments have to offer higher returns to investors to take that risk, especially compared to the UK government.
You can see this in the 12-month performance graph to the end of January for some key bond sectors below.
Bond sectors 12 month performance
Jan 20 – Jan 21 | Jan 21 – Jan 22 | Jan 22 – Jan 23 | Jan 23 – Jan 24 | Jan 24 – Jan 25 | |
|---|---|---|---|---|---|
IA £ Corporate Bond | 4.44% | -3.51% | -11.19% | 4.33% | 4.77% |
IA £ High Yield | 3.60% | 2.21% | -5.53% | 8.27% | 9.03% |
IA £ Strategic Bond | 4.51% | -0.49% | -7.63% | 4.95% | 5.68% |
IA UK Gilts | 2.92% | -6.81% | -19.59% | -1.71% | 0.10% |
The table above highlights how different the returns can be from different parts of the bond market though.
The IA £ Strategic Bond sector returns have been fairly consistently in the middle of the range over time, as you’d expect given funds in that sector can invest in all types of bonds.
This highlights the potential benefits of investing in those funds. While the overall returns might not have been the highest available, the journey hasn’t been as bumpy.
How have our fixed income Wealth Shortlist funds performed?
Our Wealth Shortlist bond funds have delivered mixed performance over the past year. Some have outperformed their peer group, while others have underperformed.
We wouldn’t expect them all to perform the same though. If all your funds in a sector are performing well at the same time, they're probably investing in similar areas.
Investing in funds isn't right for everyone. Investors should only invest if the fund's objectives are aligned with their own, and there's a specific need for the type of investment being made. Investors should understand the specific risks of a fund before they invest, and make sure any new investment forms part of a long-term diversified portfolio.
For more details on each fund and its risks including charges, see the links to their factsheets and key investor information below.
Artemis High Income
The best-performing Wealth Shortlist fixed income fund over the past year was Artemis High Income with a return of 11.28%*.
The fund focuses on paying a high income to investors, mainly by investing in bonds. But it can also invest up to a fifth of its assets in UK and European shares.
A focus on high-yield bonds and investments in shares that pay a dividend makes it a little different from most bond funds, though it does make it a higher-risk option.
High yield bonds have been the best-performing area of bond markets over the 12-month period, which has helped the fund outperform the wider peer group.
The fund tends to only have a small amount invested in government bonds. As government bonds have generally seen smaller increases in value than corporate bonds, this has also acted as a tailwind when compared to peers.
The fund takes charges from capital, which can increase the potential income paid, but reduce the amount of capital growth.
Our new 'Meet the Managers' YouTube series
We recently sat down with David Ennett, co-manager of the Artemis High Income fund, to get his thoughts on what could be next for bond markets.
Jan 20 – Jan 21 | Jan 21 – Jan 22 | Jan 22 – Jan 23 | Jan 23 – Jan 24 | Jan 24 – Jan 25 | |
|---|---|---|---|---|---|
Artemis High Income | 1.33% | 4.21% | -4.94% | 7.21% | 11.28% |
IA £ Strategic Bond | 4.51% | -0.49% | -7.63% | 4.95% | 5.68% |
Legal & General All Stocks Gilt Index
The worst-performing Wealth Shortlist fixed income fund over the last 12 months was the Legal & General All Stocks Gilt Index fund, returning 0.11% over the period**.
The fund offers a simple way to invest in UK government bonds across all maturities. It can help diversify a portfolio focused on shares or other types of investment.
The fund takes charges from capital, which can increase the income paid, but reduce capital growth.
As the fund only invests in UK gilts, it’s concentrated at an asset class level. But there also aren’t many gilts so it’s concentrated, and each investment can have a large impact on performance, which adds risk.
Jan 20 – Jan 21 | Jan 21 – Jan 22 | Jan 22 – Jan 23 | Jan 23 – Jan 24 | Jan 24 – Jan 25 | |
|---|---|---|---|---|---|
Legal & General All Stocks Gilt Index | 2.64% | -6.65% | -18.79% | -1.72% | 0.11% |
IA UK Gilts | 2.92% | -6.81% | -19.59% | -1.71% | 0.10% |