- Who We Serve
- What We Do
- About Us
- Insights & Research
- Who We Serve
- What We Do
- About Us
- Insights & Research
Bond Market Opportunities for Investors in 2025
We examine how a potentially complex bond market in 2025 could still offer opportunities in high-yield bonds, municipal bonds, and inflation-protected securities.
- Portfolio Construction
- High Yield Strategy
- Risk Management
- Fixed Income Insights
Key Points
What it is
The high yield bond market continues to benefit from historically high credit quality, above-average yields, and our expectation of below-average defaults.
Why it matters
While rate cuts and inflation pose risks in 2025, we believe investors may find a few opportunities in high yield bonds, municipal bonds, and inflation-protected securities.
Where it's going
Looking to 2025, we think elevated yields will continue for Treasurys, municipal bonds, and corporate bonds, notably high yield.
Following the clear downward trends of U.S. inflation and interest rates this year, we think the bond market in 2025 may prove a bit more complex to navigate. While there are risks around the extent of rate cuts and inflation trends next year, we believe investors can find a few opportunities in high yield bonds, , and inflation-protected securities. Let’s take a closer look.
The high yield bond market continues to benefit from an historically high , above-average yields, and our expectation of below-average defaults. Healthy balance sheets and sufficient profitability to cover interest payments support strong fundamentals, and we expect defaults to fall well below the historical average of 4%. With yields above 7%, our expectation of low defaults and a supportive Federal Reserve are positive for investors seeking total returns with reduced volatility compared to equities.
Strong fundamentals and yields also set up municipal bonds well for 2025. The average yield stands at above 3.5%, well over the 10-year average. Keep in mind that municipal bond income is tax free for taxable investors. Based on the highest income tax bracket in the U.S., the yield is the equivalent to about 6% for a bond where income is taxable. Among state and local government issuers, we think healthy reserves, improved pension funding, and less debt provides a margin of safety from unexpected policy, economic, or other shock events.
are priced for near-perfection, reflecting expectations that the Fed will successfully meet their 2% inflation target over the next five to 10 years. Currently, core inflation, which excludes more volatility energy and food prices, is above 3%. Even as inflation has come down, U.S. economic growth, high government spending, and potentially tariffs may pressure inflation upwards and challenge the Fed to meet its goal. By and large, we expect the path of inflation to be bumpy, making TIPS an important defensive portfolio component for unanticipated inflation.
Increased bond yields over the past two years have been a dramatic departure from the low yields and returns that investors experienced the previous 15 years. , we think elevated yields will continue for Treasurys, municipal bonds and corporate bonds, notably high yield. In our view, these segments of the fixed income market offer fair compensation for investors and attractive yields relative to cash.
Municipal bonds are issued by state and local governments to pay for expenditures including highways, bridges or schools. Income from municipal bonds are often exempt from taxes.
Treasury inflation-protected securities (TIPS) are Treasury securities indexed to inflation to protect against inflation-related purchasing power deterioration.
Credit quality measures a company's ability to repay its debt. Investors evaluate credit quality to determine the risk of investing in bonds.
Main Point
Strategic Insights for the 2025 Bond Market
High-yield bonds, municipal bonds, and inflation-protected securities could provide investors with a versatile tool kit to navigate the evolving opportunities of the 2025 bond market.
2025 Global Investment Outlook
Chris Roth
Portfolio Manager
Chris Roth is chief investment officer (CIO), global fixed income for Northern Trust Asset Management. Chris oversees the investment strategy, process and approach for the firm’s fixed income business globally.
Read BioContact Us
Interested in learning more about our expertise and how we can help?
IMPORTANT INFORMATION
Northern Trust Asset Management (NTAM) is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.
Issued in the United Kingdom by Northern Trust Global Investments Limited, issued in the European Economic Association (“EEA”) by Northern Trust Fund Managers (Ireland) Limited, issued in Australia by Northern Trust Asset Management (Australia) Limited (ACN 648 476 019) which holds an Australian Financial Services Licence (License Number: 529895) and is regulated by the Australian Securities and Investments Commission (ASIC), and issued in Hong Kong by The Northern Trust Company of Hong Kong Limited which is regulated by the Hong Kong Securities and Futures Commission.
For Asia-Pacific (APAC) and Europe, Middle East and Africa (EMEA) markets, this information is directed to institutional, professional and wholesale clients or investors only and should not be relied upon by retail clients or investors. This document may not be edited, altered, revised, paraphrased, or otherwise modified without the prior written permission of NTAM. The information is not intended for distribution or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation. NTAM may have positions in and may effect transactions in the markets, contracts and related investments different than described in this information. This information is obtained from sources believed to be reliable, its accuracy and completeness are not guaranteed, and is subject to change. Information does not constitute a recommendation of any investment strategy, is not intended as investment advice and does not take into account all the circumstances of each investor.
This report is provided for informational purposes only and is not intended to be, and should not be construed as, an offer, solicitation or recommendation with respect to any transaction and should not be treated as legal advice, investment advice or tax advice. Recipients should not rely upon this information as a substitute for obtaining specific legal or tax advice from their own professional legal or tax advisors. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities. Indices and trademarks are the property of their respective owners. Information is subject to change based on market or other conditions.
All securities investing and trading activities risk the loss of capital. Each portfolio is subject to substantial risks including market risks, strategy risks, advisor risk, and risks with respect to its investment in other structures. There can be no assurance that any portfolio investment objectives will be achieved, or that any investment will achieve profits or avoid incurring substantial losses. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Risk controls and models do not promise any level of performance or guarantee against loss of principal. Any discussion of risk management is intended to describe NTAM’s efforts to monitor and manage risk but does not imply low risk.
Past performance is not a guarantee of future results. Performance returns and the principal value of an investment will fluctuate. Performance returns contained herein are subject to revision by NTAM. Comparative indices shown are provided as an indication of the performance of a particular segment of the capital markets and/or alternative strategies in general. Index performance returns do not reflect any management fees, transaction costs or expenses. It is not possible to invest directly in any index. Net performance returns are reduced by investment management fees and other expenses relating to the management of the account. Gross performance returns contained herein include reinvestment of dividends and other earnings, transaction costs, and all fees and expenses other than investment management fees, unless indicated otherwise. For U.S. NTI prospects or clients, please refer to Part 2a of the Form ADV or consult an NTI representative for additional information on fees.
Forward-looking statements and assumptions are NTAM’s current estimates or expectations of future events or future results based upon proprietary research and should not be construed as an estimate or promise of results that a portfolio may achieve. Actual results could differ materially from the results indicated by this information.
Not FDIC insured | May lose value | No bank guarantee