2024: The Year of the Bond

In 2024, investors have made a remarkable shift, putting a historic $600 billion into global bond funds. This surge comes as they seek to benefit from some of the highest yields seen in decades, especially in light of an uncertain outlook for 2025.

As inflation rates continue to decline, central banks have begun to reduce interest rates. This trend has motivated investors to secure the relatively high yields available in the bond market, marking a significant turnaround after witnessing $250 billion leave fixed-income funds in 2022.

Vasiliki Pachatouridi, head of EMEA iShares fixed income strategy at BlackRock, emphasizes that the main theme this year is income. "We are seeing the income being put back into fixed income. We haven’t seen these levels of yields in almost 20 years,” she states.

As central banks lower short-term borrowing costs, bond yields tend to go down while bond prices increase. Although the ICE BofA global bond index has seen unspectacular returns hovering around 2 percent this year, it’s worth noting that yields peaked at over 4.5 percent last year, a level not seen since 2008.

By mid-December, a total of $617 billion had flowed into bond funds across both developed and emerging markets, according to EPFR, surpassing the $500 billion invested in 2021 and positioning 2024 to be a record year for bond investments.

On the other hand, stock markets have attracted $670 billion in investments, with indices in the US and Europe reaching new highs. Additionally, cash equivalent money market funds, known for their high yields and low risk, have performed remarkably well, drawing in more than $1 trillion.

The Appeal of Corporate Bonds

Corporate bonds have become increasingly attractive, providing higher yields than government debt. This sector has shown resilience as companies successfully managed the implications of rising central bank interest rates.

The yield on the ICE BofA global corporate bond index has reached a point not seen compared to risk-free government debt since before the financial crisis of 2007.

Willem Sels, global chief investment officer at HSBC’s private bank, notes that many companies locked in their funding for longer durations before interest rates began to climb. This proactive approach has minimized the impact of rising borrowing costs on these firms. Concurrently, many companies have benefited from higher earnings on their cash reserves.

The Rise of Passive Investment

These developments have prompted a growing preference for passive investment strategies, particularly exchange-traded funds (ETFs). By the end of November, passive ETFs were on track for a record year, with $350 billion in inflows, as per Morningstar Direct.

Professor Martin Oehmke from the London School of Economics points out that "ETFs provide investors with access to a range of assets, including bonds, that were previously more difficult to trade." He explains that corporate bonds tend to be less liquid, but ETFs facilitate easier access to this market.

Leading firms in this space, such as BlackRock and Vanguard, have greatly benefited from this trend. BlackRock’s iShares fixed income ETF segment has attracted about $111 billion in inflows from January through October, according to Morningstar estimates. In addition, Vanguard’s bond funds have seen approximately $120 billion in new investments, with a substantial portion directed to its index funds, including ETFs.

Not to be overlooked, PIMCO, known for its active management strategies, has also enjoyed a strong year, drawing in about $46 billion into its bond funds, a remarkable recovery after losing around $80 billion the prior year.

Potential Slowdown in Inflows

Despite the impressive growth in bond investments this year, there are concerns that inflows might slow down in 2025. The anticipated tax cuts and deregulation under President-elect Donald Trump have led to a surge in US stock markets, boosting investment in equities and reducing bonds' relative appeal.

Recent data illustrates a significant disparity, with $117 billion flowing into US stock funds just four weeks following Trump’s victory, compared to a mere $27 billion invested in global bonds.

Furthermore, some investors are skeptical about the potential for further rallies in corporate bonds after this year’s strong performance. Carl Hammer, global head of asset allocation at SEB Bank, articulated this sentiment, stating, "It seems very hard to continue to expect spreads to tighten much more, and I don’t believe that bond yields will be much lower from where we are today."

bonds, investing, yields