The age-old adage “slow and steady wins the race” aptly sums up how fixed income investments have performed so far in 2025.
Right up to the final five trading days of the first half, the Bloomberg US Aggregate Bond Index’s total return topped the S&P 500 Index’s total return over the same period. In those final days, stocks surpassed the bonds’ 4% total return, finishing up 6% in the first half. But unlike the S&P 500 Index, the US Aggregate Bond Index didn’t experience the major swings that rattled equity investors in the first half.
Will this trend of solid returns and stability continue through year-end? Here are our projections for the second half of 2025:
Midyear fixed income outlook
It’s been a bumpy first half of 2025, filled with policy changes, economic forecast revisions and volatile markets. Yet, through it all, diversification between stocks and bonds has continued to work, with broadly diversified portfolios charting a smoother ride than concentrated portfolios.
Coming into 2025, the Fed had already cut its policy rates by a full percentage point to 4.25-4.50%, tracking the return of reasonable slack in the labor market and the decline in inflation below 3% from a peak of 9% in 2022. This year, the Fed has held policy rates steady, waiting to see how the economy responds to President Donald Trump’s first 100 days in office. Once the effects of trade and regulatory changes begin to appear in the U.S. economy, we believe the Fed could further ease policy.
Today’s high policy rates act as headwind for the economy, as seen by relatively high mortgage, auto and personal loan rates for consumers. Further, high cash investment rates attract funds away from stocks and bonds by design, supporting higher borrowing costs. Should the Fed cut policy rates, it may have an indirect impact on consumer borrowing rates and should encourage some cash investors back into a broader range of investments, such as fixed income.
Bottom line: Fixed income yields and prices track the Fed’s policy rate, inflation, growth, and investor expectations. Healthy growth, moderate inflation and supportive investor expectations equate to reasonable yields, making fixed income a key diversifier and even an interesting asset class on a stand-alone basis.
Midyear outlook: Will markets remain strong?
Despite early twists and turns, markets ended the first half of 2025 on a strong note. Ameriprise Financial experts share their projections for the U.S. economy and markets as we enter the back half of the year.
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What should investors do?
Cash and cash investments have been a significant source of moderate returns over the past two years. However, should the Fed resumes cutting rates, we anticipate cash yields may fall in lockstep. Where can investors turn to instead?
Here are a few considerations:
- Waiting to transition to fixed income comes at a price: While a certain level of cash is necessary and prudent, excess cash can become a drag on portfolio returns as the Fed lowers rates. Investors could wait until cash investment yields decline to modest levels. However, fixed income investment yields are likely to be lower when waiting.
- Fixed income can act as a stabilizer: The combination of lower inflation that allows the Fed to cut rates and demand from other investors looking to move from cash into fixed income suggests that today’s more favorable fixed income yields may soon be in the past. Still, the duration of fixed income may act as a better stabilizer than cash in blended stock and bond portfolios.
- Intermediate-term fixed income presents an attractive opportunity: We believe intermediate fixed income, with maturities between two and 10 years, is the likely sweet spot of the curve today, potentially earning sustained yield for longer than cash investments while also offering some liquidity. Once the U.S. Treasury announces plans for funding over the next year, we believe yields will likely rise further out the curve, at least temporarily.
- Diversification is beneficial in challenging environments: Investors with concentrated bond portfolios may want to consider diversifying across a broad range of investments. Rather than just owning U.S. Treasuries or U.S. Investment Grade Corporates, consider a portfolio with both asset classes as well as agency, mortgage-backed securities and municipals, where appropriate. Uncertainty today can take on a lot of forms, and that broad diversification charts a prudent course for investment portfolios.
Bottom line: In an environment flush with uncertainty around trade policy, fiscal reforms and deregulation, more risk-averse investors may look for investments that offer moderate return potential with muted downside. While it can be argued that stocks are near full value, bonds are reasonably valued given the yields offered today and stand out in the context of the past 15 years.
Learn more: What to know about bonds and fixed income investing
How does fixed income fit into your portfolio?
An Ameriprise financial advisor can help determine how bonds fit into your personalized investment strategy based on your unique needs, risk tolerance and financial goals.