Bonds Bounce Back With 6.7% Return, Marking Strongest Rally Since 2020

Fixed income is finally having its moment in the spotlight. The Bloomberg US Aggregate Bond Index has delivered ~6.7% in total returns throughout 2025, positioning bonds for their strongest annual performance since 2020. Federal Reserve rate cuts have overpowered deficit anxieties, lifting both Treasurys and corporate debt as investors rush to lock in elevated yields.

• Cooling inflation, Fed rate cuts, and a softer labor market have created near-ideal conditions, though uncertainty around a December move has risen with futures now showing a 46% chance.
• The 10-year Treasury yield has slipped to 4.142% this year, while investment-grade spreads narrowed to late-1990s levels before edging back out to 0.83 percentage points.

Risk factors remain: Despite the rally, risks are hard to ignore as the $1.8T fiscal deficit remains essentially unchanged from last year, raising concerns that heavy government borrowing could eventually drive investors away. Invesco’s Matt Brill prefers short-term bonds, arguing that mixed economic data will keep the Fed cutting rates. Principal Asset Management’s Mike Goosay echoes the caution, warning that “You can only borrow so much before investors start to move away from you.”