This week, we continue our 2024 year in review with a look at how fixed income performed last year. One of the hot topics in the market over the past few years has been the influence of the Federal Reserve’s interest rate decisions.
These decisions have certainly affected the fixed income markets, particularly in 2024 as interest rate cuts were made.
The Impact of Interest Rates on Bonds
The Fed Funds Rate peaked in July of 2023 at 5.5%, and was held there until September of 2024, when rates were cut for the first time.
Image: 5 Year Historical Fed Funds Rate
Typically, when interest rates go down, bond prices go up, which is consistent with what we saw in the middle of 2024, as the market anticipated rate cuts, giving bonds (as measured by the Barclays Aggregate Index) their best month of the year in July, returning 2.8%.
However, 2024 ended up being a choppy year for bonds. The uncertainty of the Federal Reserve’s actions led to more volatility in bonds throughout the year, and bonds returned 1.37% for the year.
Looking Ahead to 2025
Looking forward, higher yields should lead to a better period ahead for bond investors, with the U.S. Aggregate Bond Index currently yielding 4.91%. Long term, a bond investor will essentially receive the yield on their fixed income as their total return.
That explains the lower returns of the past decade, with bond yields hovering in the 2% range. Even though bonds show price volatility, if an investor holds their bond to maturity, they will receive the interest rate when they acquired the bond over the life of the investment.
Bond Interest Rates Internationally
Rates have gone up overseas too, with emerging market bonds currently carrying a yield around 7.8% and European corporate bonds currently carrying a yield around 3.15%. This is especially notable in Europe, considering this same basket of bonds was carrying a negative yield back at the beginning of 2022.
Brighter Future for Bonds
Despite the lukewarm returns of 2024 for bond investors, higher yields have the future looking brighter. Combining these higher yields with the well above average stock market returns of the past two years, it could be a suitable time to ‘take some gains’ from stocks and reinvest them in fixed income to capture the higher yield in the bond market.
Schedule a call with our team to review your 2024 and get ahead in 2025. Contact us today.
