Investors flocked to global bond funds in 2024, pouring in a record $600 billion, capitalizing on historically high yields amidst an uncertain economic outlook for 2025. This surge in investment follows a challenging 2022, where fixed-income funds experienced outflows of $250 billion.
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Falling inflation has enabled central banks to ease interest rates, prompting investors to secure the attractive yields currently available. This shift has finally ushered in a “year of the bond,” fulfilling long-held expectations.
“Income is the driving force,” explains Vasiliki Pachatouridi, head of EMEA iShares fixed income strategy at BlackRock. “We’re witnessing a resurgence of income being reinvested in fixed income. Yields at these levels haven’t been seen in nearly two decades.”
Bond yields typically decrease, and prices increase, in response to central bank reductions in short-term borrowing costs.
While the ICE BofA global bond index returned a modest 2% this year, the yield peaked at over 4.5% late last year, reaching its highest point since 2008.
Financial data provider EPFR reports that by mid-December, inflows into developed and emerging market bond funds totalled $617 billion, surpassing the previous record of $500 billion set in 2021, establishing 2024 as a landmark year for bond investments.
Concurrently, equity markets attracted $670 billion in inflows, propelling U.S. and European indices to new highs. Cash equivalent money market funds, offering high yields and minimal risk, led the way with over $1 trillion in inflows.
Corporate Bonds Fuel the Demand
Corporate bonds, offering higher yields compared to government debt, have experienced a significant surge in popularity, rallying as companies successfully navigated the increase in central bank interest rates. The yield on the ICE BofA global corporate bond index has plummeted to its lowest level relative to risk-free government debt since the pre-2007 financial crisis.
“Many companies secured long-term funding before interest rates began rising a few years ago,” notes Willem Sels, global chief investment officer at HSBC’s private bank. “Consequently, the impact of increasing borrowing costs on corporations was less severe than anticipated. Simultaneously, numerous companies saw increased earnings on their cash holdings.”
Passive ETFs Dominate Investment Strategy
Investors have demonstrated a strong preference for passive exchange-traded funds (ETFs), poised for a record year with $350 billion in inflows by the end of November, according to Morningstar Direct data.
“ETFs provide investors with access to a broader range of assets, including bonds, which were previously more challenging to trade,” explains Martin Oehmke, professor of finance at the London School of Economics. “Corporate bonds, known for their illiquidity, are a prime example where ETFs offer simplified access to this market with significantly enhanced liquidity.”
Industry giants BlackRock and Vanguard have capitalized on this trend. BlackRock’s iShares fixed income ETF business alone garnered an estimated $111 billion in inflows between January and October, according to Morningstar Direct. Vanguard’s bond funds attracted an estimated $120 billion, primarily directed towards its index business, which encompasses ETFs. PIMCO, renowned for active management, also experienced a resurgence, attracting approximately $46 billion into its bond funds after outflows of $80 billion in 2022.
Potential Headwinds for 2025
Several factors could potentially dampen inflows in 2025. President-elect Donald Trump’s proposed tax cuts and deregulation policies have spurred a rally in U.S. equities, leading to a surge in equity inflows, potentially diminishing the allure of bonds. Data from EPFR and TD Securities reveals that $117 billion flowed into U.S. stock funds in the four weeks following Trump’s November 5th victory, exceeding four times the $27 billion directed towards global bonds.
Furthermore, investors remain skeptical about the potential for further gains in corporate bonds after this year’s robust performance.
“Expecting significant further spread tightening seems unrealistic, and I doubt bond yields will fall much below current levels,” cautions Carl Hammer, global head of asset allocation at Swedish bank SEB.
Conclusion
The remarkable influx of capital into bond funds in 2024 underscores the attractiveness of fixed income in an environment of easing monetary policy and historically high yields. However, potential headwinds, including the impact of President-elect Trump’s policies and skepticism surrounding further corporate bond rallies, suggest that the pace of these inflows might moderate in 2025. Investors should carefully assess these factors when making investment decisions in the coming year.
