2024 was a mixed year for bonds with plenty of ups and downs.
With multiple interest rate cuts expected during the first half of the year, lots of investors were positive on the likely returns from bonds.
However, it didn’t quite turn out that way.
We got fewer rate cuts and they came later in the year than most had expected.
But what could 2025 bring?
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 next for bond markets in 2025?
We remain positive on fixed income overall. But this isn’t because we think there are lots of rate cuts coming.
There could be some, but the pace of any cuts is very uncertain as things stand.
While the Bank of England suggested in its November guidance that cuts should be expected, near-term expectations for the rates crept up slightly in December following stronger than expected wage data.
The latest UK Autumn Budget will also likely provide a bigger than expected fiscal boost to the economy and that’s good news for the beneficiaries of the spending.
However, it means economists like Capital Economics have raised their expectation for inflation in the UK for 2025 and 2026, but they still expect inflation to be below target in 2025. And it’s reduced the scale of rate cuts in its outlook too.
Over in the US, it’s widely thought that Trump’s policies will be inflationary as well, at least in the short term.
However, bond yields still look appealing. Many UK and US government bonds continue to offer yields above 4%, while corporate bonds are offering yields higher still (but have a higher risk of not paying their debts).
Investing in bonds today could give you a yield of over 4% with the potential for some capital growth too, that’s if interest rates do come down from current levels and stay down in future.
And don’t forget that bonds have the potential to offer useful diversification to investment portfolios that are heavily biased towards shares.
3 fund ideas to invest in bonds
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 growing capital and income, rather than focusing purely on generating a high income.
The managers can invest in all types of bonds, with 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 tweak the fund's investments based on what they see. They aim to shelter the fund 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 are given the discretion to make these decisions 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, by mainly investing in bonds, but with some investments in UK and European shares too.
Ed Legget, an equity specialist, helps the managers to select the shares for the fund.
While the fund can invest in all types of bonds, the focus on providing a high income means they have 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. But, the managers focus on those companies which they believe have the ability to pay their debts.
The managers can also use derivatives, which adds risk if used.
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.
Charges can be taken from capital, which can increase the yield but reduces the potential for 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 bonds can be higher risk and harder to trade, particularly in a falling market.
Because of this, the investment journey might 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. Charges can be taken from capital, which can increase the yield but reduces the potential for capital growth.
Annual percentage growth
Dec 2019 - Dec 2020 | Dec 2020 - Dec 2021 | Dec 2021 - Dec 2022 | Dec 2022 - Dec 2023 | Dec 2023 - Dec 2024 | |
|---|---|---|---|---|---|
Invesco Tactical Bond | 12.93% | 1.59% | -4.64% | 6.46% | 1.55% |
Artemis High Income | 1.73% | 5.92% | -10.12% | 10.92% | 10.03% |
IA Sterling Strategic Bond | 6.05% | 1.02% | -11.73% | 8.13% | 4.63% |
Royal London Corporate Bond | 8.23% | 1.03% | -16.07% | 11.58% | 5.10% |
IA Sterling Corporate Bond | 7.75% | -1.90% | -16.39% | 9.22% | 2.70% |