Government bond total returns have been disappointing over the last 10 years annualizing 1% from 2014 to 2024. Due to the strong relationship between the 10-year yield and forward 10- year returns, shown in the chart below, that isn’t too surprising as yields hovered around 2% from 2012 to 2019, and moved to 0% during COVID. However, over the next 10 years we can forecast higher return assumptions as the yield has fluctuated between 4% and 5% since the end of 2023. With structural issues around debt and a forecast of stronger nominal GDP growth in the U.S., we also forecast a high probability that yields will stay elevated and not return to the zero bound.
Source: Bloomberg, as of 1/22/2025
Once again high-quality income can be earned, and fixed income can play an important role in portfolio returns while providing important portfolio diversification and volatility protection.
For 2025, estimates of inflation at 2.4% and real growth of 2.1% means that nominal GDP will be around 4.5%, and the 10-year yield should oscillate around that level. A reacceleration of inflation and/or a recession would change those assumptions, but we do not currently forecast either of those outcomes. This means that total return for most fixed income products will be the income they generate for the year.
Source: JP Morgan Asset Management, as of 1/1/2025
The chart above shows the current yield, the diamond shape, along with the 10-year range and median yield for core and extended fixed income investments. For high quality government securities, we view mortgages as more attractive due to the higher yield of 5.3% compared to treasuries at 4.5%. For credit, there is much more value, higher quality, and the same yields in CMBS and ABS (structured credit) than traditional investment grade corporates, so we think they are much more attractive investments this year. Investors can also receive high incomes from extended areas of fixed income like high yield and levered loans but there really isn’t much value in those areas either, so risk is much higher.
For 2025 and beyond, the fixed income landscape will be much different than the past 10 years.
Sean Dillon, CMT, CFTe
SVP, Investment Strategy
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