2024 started with consensus views for lots of interest rate cuts. Some thought there could be as many as five by the US Federal Reserve (Fed), with other central banks like the Bank of England (BoE) and European Central Bank (ECB) broadly following suit.
Those predictions (especially the ones suggesting rate cuts would start in March 2024) turned out to be wrong. But that’s not unusual for economists and big picture predictions alike.
Inflation proved stickier than most expected, meaning central banks have been reluctant to ease interest rates too quickly, for fear of prices going back up again.
At the time of writing, the ECB has cut four times, with the BoE and Fed having cut twice.
While the number of cuts has been lower than predicted, the direction of travel was as predicted. And there have been cuts aplenty when looking further afield than these three central banks – New Zealand, Canada, Sweden, Switzerland, South Korea, Indonesia, Mexico, Brazil, Chile and Peru all being examples of other central banks to cut rates during 2024.
Rate cuts should be good for bonds. Bond yields tend to move in the same direction as interest rates and the opposite direction to bond prices. So, if rates go down, bond yields should go down and bond prices should rise.
It was therefore expected that 2024 was going to be a great year for bond investors.
This article isn’t personal advice. Remember, investments and any income from them can rise and fall in value, so you could get back less than you invest. Yields are variable and past performance isn’t a guide to the future. If you’re not sure if an investment’s right for you, ask for financial advice.
What’s actually happened to yields?
Recent changes in bond yields
Yield at 31 December 2023 | Yield at 30 November 2024 | |
|---|---|---|
ICE BofA Global Government Bond Index | 2.96% | 3.17% |
ICE BofA Global Investment Grade Corporate Bond Index | 4.73% | 4.54% |
ICE BofA Global High Yield | 7.81% | 7.19% |
Annual percentage growth
Nov 2019 - Nov 2020 | Nov 2020 - Nov 2021 | Nov 2021- Nov 2022 | Nov 2022 - Nov 2023 | Nov 2023 - Nov 2024 | |
|---|---|---|---|---|---|
ICE BofA Global Government Bond Index | 4.28% | -1.23% | -12.19% | 0.01% | 5.61% |
ICE BofA Global Investment Grade Corporate Bond Index | 6.78% | -0.30% | -14.80% | 3.45% | 8.68% |
ICE BofA Global High Yield | 4.94% | 3.23% | -11.25% | 8.02% | 12.89% |
Government bond yields have increased, while corporate bond yields have generally fallen.
It’s been a mixed picture and one that feels at odds with interest rate cuts.
The reason for this is that markets tend to move before things actually happen. Bond yields moved a lot in the final months of 2023, in anticipation of the expected rate cuts in 2024. Then, when the cuts didn’t come as quickly as expected, as well as there being fewer than expected, that’s caused government bond yields to rise (and their prices to fall).
How volatile have bond markets been?
While government bond yields have risen overall so far in 2024, it’s not been a smooth journey. Indeed, one thing that’s been consistent in bond markets in 2024 is volatility.
As expectations around inflation and interest rate changes have bounced around throughout the year, so have bond yields and prices.
For example, the 10-year US Treasury yield peaked around 25 April at 4.71% and troughed around 16 September at 3.61%. For the 10-year UK gilt yield, the peak was 4.55% around 6 November with a trough of 3.76% on 16 September.
Given bonds are often held as a lower risk investment or by more cautious investors who are looking to avoid the ups and downs of the stock market, this level of volatility hasn’t been ideal.
Interestingly though, while bonds have been volatile over the year, their correlation with shares has been lower than usual.
There have been periods like the start of August, where stock markets have experienced short, sharp, losses. Bonds provided more stability during these wobbles, which hasn’t always been the case in recent years during the interest rate rising cycle.
Considering that a common reason for investing in bonds is the diversification benefit they offer when held alongside shares, it will be interesting to see how this trend plays out in 2025.
How have bonds performed over the last 12 months?
Nov 2019 - Nov 2020 | Nov 2020 - Nov 2021 | Nov 2021 - Nov 2022 | Nov 2022 - Nov 2023 | Nov 2023 - Nov 2024 | Average calendar year return between 2000-2023 | |
|---|---|---|---|---|---|---|
IA Sterling Strategic Bond | 5.55% | 1.82% | -11.09% | 3.70% | 9.14% | 5.11% |
IA UK Gilts | 5.67% | -1.50% | -22.78% | -5.93% | 4.02% | 3.64% |
IA Sterling Corporate Bond | 6.30% | 0.20% | -15.65% | 3.04% | 7.73% | 4.71% |
IA Sterling High Yield | 3.47% | 4.66% | -8.70% | 7.52% | 11.48% | 6.57% |
The best-performing area of the bond market has been the more risky end of corporate debt, high yield.
With government bond yields generally increasing during 2024, the higher income paid by these bonds has resulted in higher overall returns.
This is one of the riskier parts of the global bond market though, because the potential for companies who issue these bonds to default on their payments is higher.
At the opposite end of the default risk spectrum are government bonds (it’s very unlikely the UK government won’t meet their bond payments). Their returns have been positive over the last 12 months as a whole, however during 2024 to the end of November they’ve delivered negative returns.
The IA Sterling Strategic Bond sector is a reflection of the broader bond market because these funds can invest in all types of bonds as opposed to any specific area. The return of 9.14% over the last 12-months is comfortably ahead of longer-term averages.
For context, we’ve also shown the average calendar year return for these sectors since the year 2000. This shows that the last 12 months have seen strong performance across all sectors.
While these sectors have performed well over the last 12 months, it hides the fact that bonds rallied strongly in December 2023 and haven’t performed as strongly since then.
Therefore, unless December delivers something very unexpected, overall, 2024 didn’t turn out to be the year of the bond as many investors had expected.
Looking ahead to 2025 – 3 bond fund ideas
Given how wrong many predictions for 2024 were for bond markets, it doesn’t seem sensible to try to guess about how many rate cuts might come in 2025 or where inflation will be 12 months from now.
One thing that does seem likely though is that volatility could be here to stay, especially in 2025.
But with bond yields continuing to sit around the mid-single digit levels, now could be a good time to own some as part of a diversified portfolio.
Here are 3 bond fund ideas that could benefit in 2025.
Investing in these 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 diversified portfolio.
For more details on each fund and its risks, use the links to their factsheets and key investor information.
Invesco Tactical Bond
The fund is co-managed by Stuart Edwards and Julien Eberhardt who have been part of the fixed income team at Invesco for well over a decade.
Over the long term the aim is to deliver a total return, through the combination of capital growth and income, rather than focusing purely on generating a high income.
They can invest in all types of bonds, with very few constraints. This includes high-yield bonds and derivatives, both of which can add risk if used.
The performance of the fund hinges on their ability to interpret the bigger economic picture, and they can alter the fund's investments based on what they see. They aim to shelter the portfolio when they see tough times ahead, and seek strong returns as more opportunities become available.
We think this is a good fund for exposure to the wider bond market. It takes away the hassle of deciding which type of bonds to invest in and when because the managers can do this for you.
Artemis High Income
The fund is co-managed by David Ennett and Jack Holmes. It focuses on paying a high income to investors, mainly by investing in bonds, but with some investments in UK and European shares too. Ed Legget, an equity specialist, helps the managers select shares for the fund.
While the fund can invest in all types of bonds, the focus on providing a high income leads them to have a bias towards high-yield bonds. This is a higher-risk approach due to the greater potential for the bond issuers to default on their payments. However, the managers focus on those companies who they believe are able to comfortably pay their debts.
The investments in high-yield bonds and shares adds risk.
We think this is a good fund to diversify a more conservative bond portfolio or a portfolio focused on shares. The focus on income means it could be suitable as a more adventurous part of an income portfolio too. The fund takes charges from capital, which can increase the potential income paid, but reduce the amount of capital growth.
Royal London Corporate Bond
The fund is co-managed by Shalin Shah and Matthew Franklin and focuses on investment grade corporate bonds – higher-quality bonds issued by companies. They also invest some of the fund in high-yield bonds, which adds risk.
We think the team’s edge comes from their detailed research into low-profile parts of the market. These under-researched bonds might be unrated (their credit quality hasn’t been assessed by a credit ratings agency), complex and often secured against a company’s assets.
This detailed research gives the managers the ability to uncover some better investment opportunities within this specific area of the bond market.
However, these types of bond can be higher risk and harder to trade, adding liquidity risk to the fund, particularly in a falling market.
Because of this, the investment journey could be more volatile than some peers. For this reason we think it could work well as part of an investment portfolio invested for income, focused on the long term. The fund takes charges from capital, which can increase the potential income paid, but reduce the amount of capital growth.
Nov 2019 - Nov 2020 | Nov 2020 - Nov 2021 | Nov 2021 - Nov 2022 | Nov 2022 - Nov 2023 | Nov 2023 - Nov 2024 | |
|---|---|---|---|---|---|
Invesco Tactical Bond | 12.75% | 1.76% | -4.02% | 2.58% | 6.66% |
Artemis High Income | 1.64% | 5.21% | -8.47% | 6.54% | 14.95% |
IA Sterling Strategic Bond | 5.55% | 1.82% | -11.09% | 3.70% | 9.14% |
Royal London Corporate Bond | 6.51% | 3.30% | -15.50% | 5.53% | 10.22% |
IA Sterling Corporate Bond | 6.30% | 0.20% | -15.65% | 3.04% | 7.73% |