Videos › Fixed Income Perspectives › January 2025

Fixed Income Perspectives

Bonds End on a High Note

January 2025

Format: application/pdf

TRANSCRIPT

A lot has happened since our last update, so let's begin with a recap of 2024 and share our outlook for the new year.

In December, the FOMC reduced the federal funds rate by 25 basis points, lowering the target range to 4.25% to 4.5%. This marked the third rate cut for 2024, totaling a 100-basis point reduction for the year.

However, the Fed signaled a more cautious approach for 2025, projecting only two additional quarter-point cuts while emphasizing concerns about reaccelerating inflation. This shift underscores our effort to balance inflation risks and economic growth. In response, the 10-year U.S. treasury yield rose sharply, ending the year at approximately 4.6%, up 90 basis points in the final months and over 50 basis points higher than where it began the year.

Investment Grade 4Q2024 and Annual Total Return

Sources: Bloomberg as of 12/31/2024. Bloomberg US Govt Bond 1-3 year index, Bloomberg US Treasury Index, Bloomberg Muni Short (1-5) Index, Bloomberg Municipal Bond Index, Bloomberg 1-5 year Gov/Credit Index, Bloomberg, Bloomberg US Government/Credit Index.
Information is subject to change and is not a guarantee of future results.

Chart 1, 1:09– The fixed income markets navigated a volatile final quarter as investors digested policy uncertainty surrounding the incoming Trump administration. Despite this, total returns were positive for the second consecutive year. Investment grade municipal and corporate bond yields remained attractive with solid credit quality driving consistent demand. Shorter maturities outperformed with returns between 2% and 4%, while broader market indices delivered roughly 1% returns for the year.

High Yield 4Q2024 and Annual Total Return

Source: Bloomberg as of 12/31/2024.
Information is subject to change and is not a guarantee of future results.

Chart 2, 1:41– High yield markets excelled in 2024, outperforming investment grade bonds.

Compelling yields, strong corporate fundamentals and robust demand for risk assets drove significant spread tightening. Emerging market high yield bonds were a standout, buoyed by strong commodity prices and broader economic growth.

Additionally, U.S. and European bank loans outperformed traditional high yield bonds, benefiting from investor demand for floating rate assets and higher yields amid reduced distress levels.

10-Year Treasury Yield

Source: Bloomberg U.S. Treasury Index as of 1/17/2025.
Information is subject to change and is not a guarantee of future results.

Chart 3, 2:12– As we look to 2025, the bond market remains highly reactive to incoming data.

The upward momentum in rates from quarter four accelerated in early January. A stronger than expected labor report had the 10-year treasury nearing 4.8% before retreating after a favorable CPI reading. We expect this volatility to persist as investors reassess the Federal Reserve's policy trajectory, inflation trends and the new administration's fiscal agenda.

Our year-end forecast for the federal funds rate remains at 3.75% to 4.25% broadly aligning with market expectations. We also anticipate that longer term rates will stay elevated for an extended period.

With yields across fixed income markets well above recent lows and credit fundamentals supportive, we continue to believe the asset class presents opportunities for investors to capture attractive cash flows and position for better total returns.

Important Information

The views expressed represent the opinions of City National Rochdale, LLC (CNR) which are subject to change and are not intended as a forecast or guarantee of future results. Stated information is provided for informational purposes only, and should not be perceived as personalized investment, financial, legal or tax advice or a recommendation for any security. It is derived from proprietary and non-proprietary sources which have not been independently verified for accuracy or completeness. While CNR believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Actual results, performance or events may differ materially from those expressed or implied in such statements.

All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met, and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.

City National Rochdale, LLC is an SEC-registered investment adviser and wholly-owned subsidiary of City National Bank. Registration as an investment adviser does not imply any level of skill or expertise.

Fixed Income investing strategies & products. There are inherent risks with fixed income investing. These risks include, but are not limited to, interest rate, call, credit, market, inflation, government policy, liquidity or junk bond risks. When interest rates rise, bond prices fall. This risk is heightened with investments in longer-duration fixed income securities and during periods when prevailing interest rates are low or negative.

Index Definitions:

Bloomberg U.S. Treasury Index: includes all publicly issued, U.S. Treasury securities that are rated investment grade, and have $250 million or more of outstanding face value.

The Bloomberg US Municipal Bond Index measures the performance of investment grade, US dollar-denominated, long-term tax-exempt bonds.

The Bloomberg US Investment Grade Corporate Bond Index measures the performance of investment grade, corporate, fixed-rate bonds with maturities of one year or more.

Bloomberg Municipal Bond Muni Short (1-5) Index 1-5 year maturities of the US Municipal bond index.

The Bloomberg US 1-5 year Government/Credit Float-Adjusted Bond Index is a float-adjusted version of the US 1-5 year Government/Credit Index, which tracks the market for investment grade, US dollar-denominated, fixed-rate treasuries, government-related and corporate securities.

The Bloomberg Municipal Managed Money Short/ Intermediate Index is a market-value weighted index that measures the performance of publicly traded municipal bonds in the short/intermediate term tax-exempt bond market. The index includes: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds.

The Bloomberg U.S. Intermediate Government/Credit Index is an unmanaged index that measures the performance of investment grade, fixed-rate, taxable corporate and government-related debt securities with maturities of 1–10 years. The index is based on all publicly issued debt securities.

The Bloomberg Municipal High Yield Bond Index measures the performance of non-investment grade, US dollar-denominated, and non-rated, tax-exempt bonds.

The Bloomberg US Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody's, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Bloomberg EM country definition, are excluded.

Check out previous perspectives:

Put our insights to work for you.

If you have a client with more than $1 million in investable assets and want to find out about the benefits of our intelligently personalized portfolio management, speak with an investment consultant near you today.

If you’re a high-net-worth client who's interested in adding an experienced investment manager to your financial team, learn more about working with us here.