The economic landscape is characterized by steady growth and controlled inflation, creating a favorable environment for these high-quality bonds.¹ The US Federal Reserve's (Fed) recent rate cuts have stabilized interest rates, making IG bonds an attractive option for those seeking reliable returns with lower risk.¹

Corporate fundamentals remain robust, with companies maintaining strong balance sheets and high liquidity.² This financial health supports the creditworthiness of IG bonds, ensuring that investors can expect consistent interest payments and a lower likelihood of default. The relatively low spreads on these bonds, while indicating rich valuations, also reflect the market's confidence in their stability.²

The following are eight key factors that we believe should support IG bonds in 2025:

1. Trump concerns likely well priced in now …

In recent weeks, Donald Trump's second US presidency has been the most dominant factor affecting global bond markets. Markets are concerned that increased import tariffs, tighter immigration controls, and pro-growth spending might lead to higher US inflation. This has led to a significant paring back of US interest rate-cut expectations and elevated US Treasury yields.

Ten-year Treasury yields moved back towards their October 2023 high of above 5.0%, detracting from bond returns, including IG bonds. However, the magnitude of yield rises means Trump-related risks are now probably priced in.

2. … and some potential Trump positives, too

Much of the focus has been on the potential inflationary impact of Trump’s policies. However, there are also potential upside factors:

3. Attractive all-in yields

All-in IG bond yields have risen significantly, improving the asset class's attractiveness from an income and valuation perspective. The current global IG index bond yield of 4.8% is well above the 10-year average of 3.1% (Chart 1).

Higher yields improve the valuation of IG bonds compared to other risk assets, including equities – for example, the current global IG yield of 4.8% is now well above the S&P 500 earnings yield of 3.3%.³

4. Relative safety benefits of IG bonds

IG bonds’ structural features can make them less risky than other assets. Compared to equities, they are higher up the capital structure and usually provide more consistent cash flows, making their returns less volatile and more secure. Of course, on the flip side, there’s lower upside potential. However, equity valuations are expensive following the S&P 500’s two consecutive years of +25% returns. This could, therefore, see investors rotate into less risky assets, such as IG bonds.

IG bonds also offer a degree of resilience in weaker economic conditions. Many are backed by the earnings of highly rated, secure companies with strong balance sheets. In addition, IG bonds also get some downside protection from their yields being responsive to treasury yield changes, which usually go down in periods of weaker growth and/or increased investor risk aversion.

5. Good corporate fundamentals

Furthermore, IG corporate bonds’ secure cash flows are linked to key financial fundamentals, which are currently strong and supportive. This includes favorable indicators such as modest net leverage, ample interest coverage, and strong profit margins. In the US, aggregate (post-tax) corporate profits are still near record highs (Chart 2).

6. Interest rate-cutting environment

Historically, interest rate-cutting environments tend to be good for IG bonds. Treasury yields usually fall in response to rate cuts, boosting returns. That said, it is highly unusual that this has not been the case in the US on this occasion. The Fed started its rate-cutting cutting cycle in June 2024, but Treasury yields have since risen. While part of this may be due to Trump inflation concerns, ultimately, we believe the more normal pattern should assert itself over time.

7. Likely inflows from money market funds

The Fed increased interest rates from 0–0.25% in early 2022 to 5.25%–5.50% by mid-2023, helping to attract massive inflows into money market funds (Chart 3).

By the end of Q3 2024, total US money market fund assets reached US$6.8 trillion, up from US$1.6 trillion at the end of 2022. However, cash rates are now falling in line with lower interest rates. As such, we think the substantial cash reserves parked on the sidelines could start moving into risk assets, especially relatively secure IG bonds.

8. Moderate growth usually the sweetspot for IG credit

Historically, rather than high economic growth periods, there have been periods of moderate economic growth in the range of 1–3%, when the best IG bond returns have been seen on average.⁴ Our economists forecast moderate growth of 2.0% and 1.1%, respectively, in the US in 2025.⁵

¹ "2025 Bond Market Outlook: Yields Range-Bound but Volatile." Morningstar, December 2024. https://www.morningstar.com/bonds/2025-bond-market-outlook-yields-range-bound-volatile.
² "2025 Market Outlook: Fixed Income." On Investing. Charles Schwab, December 2024. https://www.schwab.com/learn/story/2025-market-outlook-fixed-income.
³ As of January 24, 2025.
⁴ Morgan Stanley, based on 1948–2024 time period.
⁵ abrdn Global Macro Research, as of end-December 2024.

Important information

Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.

Fixed income securities are subject to certain risks including, but not limited to: interest rate (changes in interest rates may cause a decline in the market value of an investment), credit (changes in the financial condition of the issuer, borrower, counterparty, or underlying collateral), prepayment (debt issuers may repay or refinance their loans or obligations earlier than anticipated), call (some bonds allow the issuer to call a bond for redemption before it matures), and extension (principal repayments may not occur as quickly as anticipated, causing the expected maturity of a security to increase).

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