Wall Street likes these bonds for strong 2025 income
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Investors looking for income in 2025 should still find attractive yields in corporate bonds. Investment-grade corporates saw their credit spreads tighten this year, making them expensive. However, many on Wall Street believe they remain a good place to put money to work. “We believe the combination of a return of yield relative to the last cycle, sound corporate fundamentals, and a Fed committed to extending the U.S. economy’s expansion, could enable investors to earn attractive income across fixed income spread sectors like corporate and securitized credit,” Goldman Sachs Asset Management said in its 2025 outlook. “Investment grade bonds stand out as an option for enhancing portfolio returns, in our view, striking a balance between earning income and risk management,” the Wall Street investment bank added. Companies have those high credit ratings for a reason, said Collin Martin, fixed income strategist at Schwab Center for Financial Research. Corporate profits and balance sheets remain strong, he added. “Considering you can get a yield of 5% or more, we think that is very attractive, especially now that short-term rates have fallen,” he said. “You can earn higher yields with intermediate-term investment-grade corporates than what you can get with money market funds or Treasury bills.” Cash-equivalent instruments like money market funds and certificates of deposits have benefited from the high interest-rate environment. Those yields have ticked down as the Federal Reserve cut interest rates starting in September. For instance, the Crane 100 Money Fund Index , which is based on the largest taxable money funds, had an annualized seven-day yield that topped 5% earlier this year. It has since fallen to 4.41%. The central bank cut rates by another quarter percentage point last Wednesday, and indicated the potential for two more decreases in 2025. That’s less than the four cuts the Fed signaled back in September for 2025 but, if enacted, would still represent a full 1.5 percentage point decline from where benchmark rates stood as recently as last August. UBS believes supportive technicals and investor inflows will underpin investment-grade bonds next year. Investment grade corporate paper will “deliver mid-single-digit total returns,” Mark Haefele, chief investment officer at UBS Global Wealth Management, said in the bank’s 2025 outlook . “These returns come from both yield (accounting for around two-thirds of returns) and capital appreciation (around one-third), as steepening yield curves mean investors benefit from a ‘roll down’ as bonds approach maturity.” Where to invest Wells Fargo favors intermediate-term taxable bonds for the best relative yield while considering potential interest-rate risk. “This is a great opportunity for investors that have been sitting in cash for a long time to extend maturities, lock in better yields at a longer maturity,” said Luis Alvarado, global fixed income strategist at Wells Fargo Investment Institute. “Investment grade corporates are very attractive for investors that were not used to seeing that kind of yield for a long time prior to the pandemic.” Schwab is advising investors to have a duration around that of the Bloomberg U.S. Aggregate Bond Index, which is about 6.2 years, or even lower. The index measures the broad U.S. investment-grade bond market, including Treasurys. However, strategically, it can sometimes make sense for income investors to extend duration further out, Schwab’s Martin said. For “Income-oriented investors who have a longer investing horizon, if a 4%, 5% yield or income is going to help you reach your goals, that shouldn’t stop you from considering intermediate duration or some longer-term bonds, even with the risk of yields moving higher,” Martin said. It’s also important to take into account sector-specific impacts of potential policy changes from the incoming Trump administration, according to Goldman Sachs Asset Management. That’s why active management or active bond selection is important, the firm wrote in its outlook. “From a sector perspective, we see value in counter-cyclical companies that can withstand a potential slowdown in nominal growth, such as large healthcare companies,” the team said. “We also favor companies in sectors with strong growth potential and a stable customer base, including technology companies benefiting from the surging demand for artificial intelligence.” Meanwhile, BlackRock prefers European credit over the United States for 2025, thanks to the former’s cheaper valuations. “European credit has held in remarkably well both relative to the U.S. but also, within European credit, high yield has outperformed [investment grade]. So the market within Europe is not reflecting significant growth risks,” said Amanda Lynam, head of BlackRock’s macro credit research. Uncertainties ahead Still, there are a lot of unknowns ahead along with the new administration coming into the White House in January. For instance, there is some concern that President-elect Donald Trump ‘s proposed new tariffs could push inflation higher. Yet experts believe investment-grade corporates play a role in risk management. “While a tariff shock is a potential risk, IG bonds should perform strongly in a hard landing scenario,” Haefele said. “In such a scenario, we would expect falls in government bond yields to more than offset higher credit spreads.” Locking in these yields can protect against unexpected, deeper rate cuts from the Fed, said Wells Fargo’s Alvarado. “If something breaks and the Fed is forced to cut rates the money-market yield will quickly evaporate,” he said. “Investors who are able to lock in those attractive yields will be protected until those bonds mature.” Still, investors should remain agile. Wells Fargo Investment Institute said investors should extend maturities to lock in attractive payouts if yields move above its 2025 year-end targets, which is between 4.5% and 5% for the 10-year Treasury yield and between 4.75% and 5.25% for the 30-year Treasury . It anticipates the federal funds rate will end the year between 4% and 4.25%. It currently sits between 4.25% and 4.5%. “If yields move below our targets, we favor shortening the duration of a portfolio.” — CNBC’s Jesse Pound contributed reporting.
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