- U.S. bonds had their strongest year since 2020 in 2025, with core bond and investment-grade corporate indexes returning about 7%–8% and long Treasuries above 5%.
- High-yield bonds outperformed investment grade as tight credit spreads and demand for income supported riskier credit.
- Traditional 60/40 stock-bond portfolios returned roughly 15% in 2025, reaffirming bonds’ role as both income source and risk buffer.
- Prospects for 2026 are more cautious given limited expected Fed cuts, rising fiscal pressures, and the risk of wider credit spreads and higher long-term yields.
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The year 2025 has been a rebound year for fixed income after several years of underperformance. The Fed’s rate-cutting cycle—cumulatively about 75 basis points—along with cooling inflation and resilient economic growth enabled bond prices to benefit via lowering yields. Morningstar’s US Core Bond Total-Return index (which excludes instruments with maturity ≤1 year) logged a ~7.3 % return for the year, its strongest since 2020. Investment-grade corporate bonds did slightly better, nearing 8 % returns. [1]
Longer-duration government bonds, which suffered during earlier rate-hike cycles, recovered to post over 5 % gains, benefiting from both yield curve shifts and recession/risk hedging trades as economic data weakened. High-yield credits also added value, helped by stable credit spreads and search for income in a higher-for-longer rate environment. [1]
Traditional 60/40 portfolios (60 % equities, 40 % bonds) posted total returns in the ballpark of 15 % in 2025, leveraging strong bond performance alongside equity gains. These portfolios, which often serve as benchmarks for balanced investors, benefited from the re-establishment of negative or low correlation between stocks and bonds in key periods. [2]
Looking ahead to 2026, analysts warn that the tailwinds for bonds may be weaker. Only ~60 bps of additional rate cuts are expected, limiting price appreciation in Treasuries. Strong fiscal stimulus proposals (especially tax and spending policy) may push long-term yields higher. Credit spreads remain tight after an issuance boom, risking a correction if economic or corporate conditions deteriorate. [1]
Strategically, the 2025 environment underscores the value of bond allocation not just as income generator but as risk buffer—especially in balanced portfolios. However, duration exposure will need more careful positioning: shorter maturities may provide steadier carry, while long maturities will be more sensitive to term premium pressure and inflation surprises. Alternative assets, inflation-protected securities, and global bond allocations may be more relevant in improving diversification and resilience. Open questions remain around how resilient corporate spread markets will be, how fiscal deficits will affect yield curves, and whether stock-bond correlations will endure in a more volatile macro regime.
Supporting Notes
- Morningstar US Core Bond TR Total-Return index returned ~7.3 % in 2025, best year since 2020. [1]
- Investment-grade corporate bonds returned nearly 8 %. [1]
- Long-term U.S. government bonds gained over 5 %. [1]
- High-yield bond returns exceeded investment grade, helped by tight credit spreads. [1]
- Typical 60/40 portfolios achieved ~15 % total return in 2025. [2]
- Expectations for 2026 include only ~60 bps of Fed rate cuts, fiscal stimulus risk, and possible spread widening. [1]
Sources
- [1] www.reuters.com (Reuters) — 2025-12-30
- [2] www.barrons.com (Barron’s) — 2025-10-29