Key takeaways
Performance
Higher returns helped spark positive performance across most bond market sectors in 2024 despite a modest rise in intermediate- and long-term yields. Lower-quality credit segments outperformed, driven by favorable macroeconomic conditions and robust investor demand.
The big picture
The overall outlook for bonds is notably positive. We anticipate an era where interest rates remain above inflation, helping investors achieve success in fixed income. Yields are attractive compared with most of the post-financial-crisis period. But uncertainties underlie the outlook ahead of potential U.S. immigration and trade policy changes. Monetary easing is expected to continue in 2025, albeit at a notably slower pace in the U.S.
Approach
Evolving macroeconomic conditions will test taxable credit-spread valuations that look full relative to historical levels. We favor a tactical approach to rates strategies and prefer credit sectors that have lagged recent tightening. In municipals, tax-equivalent yields for high earners are above most taxable sectors. We prefer municipal credit and see more room for spreads to tighten.
Notes:
- All investing is subject to risk, including the possible loss of the money you invest.
- Investments in bonds are subject to interest rate, credit, and inflation risk.
- Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund’s trading or through your own redemption of shares. For some investors, a portion of the fund’s income may be subject to state and local taxes, as well as the federal Alternative Minimum Tax.