As we usher in 2025, it’s clear that 2024 was a year of remarkable shifts and notable surprises in the fixed-income market. Over the past year, we gained fresh insights into the evolving dynamics of the bond market, from the steepening of the yield curve to the powerful resilience of risk assets.
Brian Lockwood Piton’s Chief Investment Officer deep dives into the year's key developments, sector performance, and macroeconomic drivers shaping fixed-income trends. He also explores how these factors inform portfolio positioning as we look ahead to 2025.
Recorded January 14, 2025
Q1 [0:14]: As we closed out 2024, how have fixed income markets performed over the last year, and what were the biggest surprises or turning points?
One of the biggest surprises is how great risk assets did. Equity markets, credit markets, everything did really well. A really powerful year for stock markets, and across the board. What that does is it puts fixed income once again in a backseat, but there are a couple of interesting things that happened within fixed income this year that I think are worth noting. First, the yield curve steepened quite a bit, and the fed started lowering rates - starting an easing cycle and then, at the end of the year, pausing that easing cycle. One of the things that are really interesting is what we have seen in the past year was a little bit different in terms of risk-reward in fixed income and more historical for fixed income than 2023 and 2022. If you remember, in 2022, both risk assets were down, and the bond market was down. In 2023, risk assets were up, and the bond market was up. It was kind of an interesting thing where people were questioning, is the bond market still a decent hedge within a total asset allocation? Whereas, this past year 2024, you had powerful risk assets. Yet the bond market actually had a down year in terms of prices. Most of the yield curve was up around 50 basis points, meaning bond prices were down as stock markets were up. So we have kind of come back to that historical ratio of risk-on risk-off between the markets. Another really powerful thing coming into this year as rates were already elevated - the one really powerful thing we saw in the bond market is the protective power of income, of coupons. Even though I just mentioned that the yield curve was up across the board, from three (3) years out to thirty (30) years, there was a total return in the market - a positive total return in the bond market. That's all the power of having the coupons elevated. A couple of years ago, that would not have been the case. We would have had another negative year of total return. But because we had those elevated coupons to start the year, fixed income ended up on a positive note.
Key Takeaways:
Risk assets soared, with strong equity and credit market performance.
Yield curve steepened as the Fed eased, then paused.
Bond prices fell while stocks rallied, returning to a classic risk-on/risk-off dynamic.
Elevated coupons cushioned bond returns, delivering overall positive performance.
Q2 [3:14]: Could you provide a breakdown of performance across various sectors (Treasuries, corporates, municipals, high yield, etc.) in 2024?
In terms of total returns for fixed income sectors, credit spreads did the best and high yield did the best in sympathy with risk markets like we just talked about. But we also saw that duration mattered. Cash markets did really well, short duration markets did better, intermediate sector did okay. It's only the really long end of the curve where rates were up the most because of the steepening curve where you saw negative returns in fixed income. As for sectors, the municipal sector broadly did okay despite a lot of supply in the year 2024. Credit sectors did fine in the 2% range. High yield sectors and emerging market sectors did pretty well in terms of risk assets in the space.
Key Takeaways:
Credit spreads led, with high yield shining alongside strong risk markets.
Duration mattered—cash and short duration outperformed, while long bonds fell on a steepening curve.
Munis held steady despite heavy supply.
Credit spreads inched up around 2%, reflecting modest gains.
High yield and emerging market sectors stood out.
Q3 [4:25]: With short-term rates having shifted over the course of the year, how has cash as an asset class fared in 2024, and do you expect its appeal to persist into 2025?
In the world of fixed income cash was king. If you think of the yield curve, where we started easing rates, cash rates and money market rates dropped by over 100 basis points, whereas the two (2) year was unchanged for the year. And then the curve started to steepen out, and rates were higher across the board, so cash really did well. If you think coming into the year, very short-term rates were almost 550 bp, 540 bp, and they fell all the way down to 4% percent over the year 2024. What we saw is a very regimented return and duration buckets. When you think of the bond market, cash market outperformed about 5%. Then your short duration buckets performed about 4%. Then intermediate fixed income, zero to 10-year kind of bonds did about 3%. And then your aggregate bond markets you across the board bond markets did 1% to 2% depending on the strategy. It's only when you get out to the really long-term bond markets where you saw negative total returns. Cash really did well. The key with cash now is the Fed is kind of paused in terms of where rates are going to go for their foreseeable future, but we're still in an easing bias. It is still a very high bar for the Fed to increase rates for the year. I would say cash at this level, you can expect it for probably the first half of the year. But then we'll see what happens with the two year trading at about a 440 bp right around where you can get cash rates right now. It is not a bad idea to see some of that money go out to the shorter part of the curve, or maybe the intermediate part of the curve, given the risk-reward of where cash can go in the future.
Key Takeaways:
Cash was king.
Steeper yield curve meant short-duration outperformed and long bonds dipped negative.
Fed paused, but maintains an easing bias, keeping cash yields in play.
Shifting some allocations to short/intermediate terms may offer better risk-reward opportunities.
Q4 [6:44]: Looking at the close of 2024, which macroeconomic factors (e.g., inflation trends, growth expectations, global central bank actions) are currently driving the fixed income markets, and which do you see carrying the most weight in early 2025?
In terms of 2024, I think one of the major catalysts was obviously both the election and fed policy. Fed policy really drove what was going on both in rate markets, as well as for a good portion of it in risk markets as well. Where we have started to see some shifting now that the Fed has kind of said -- we're going to take a wait and see for the foreseeable future, despite the fact that we know rates are still somewhat restrictive -- I think the market is going to start to take a focus on what the Fed is focused on and that's inflation. They put inflation back on the table as something they want to look at. Consumer Price Index (CPI), Personal Consumption Expenditures (PCE), Employment Cost Index (ECI) -- all these numbers are going to be important numbers to watch, along with the underlying theme that the economy is strong and the job market has come back and done well.
If you remember, we were talking about how the job market had started to slow down around that August 2024 area, but now it's come back and been pretty strong. For bond markets, we are going to go back to historical numbers and trends that we look at, which are inflation, fed policy, economy, and fiscal policy. Those are going to be the real drivers in 2025.
Key Takeaways:
Election & Fed policy drove 2024 markets.
With a Fed pause, inflation is back in the spotlight.
Strong job market keeps the economy resilient.
Key 2025 drivers: inflation, Fed policy, economy, and fiscal stance.
Q5 [8:35]: The FOMC made notable moves in 2024, including a 50 bp rate cut at their final meeting of the year. How have these policy changes influenced your portfolio positioning, and what further Fed actions are you anticipating in 2025?
In 2024, the Fed lowered rates by 100 bp. In anticipation of those lower rate actions by the Fed, we moved portfolio duration out substantially in all our strategies. But going forward, as we see the Feds taking a little bit of a pause in terms of what they're going to do, we want to see where that policy is going to go from here towards the end of the 2025 year. We think the Fed will probably be on hold for the first half of the year. Given the fact that there is still a very high bar for the Fed to turn around and become interested in rate increases, that bar is still really high. Coupled with the fact that the current level of rates is still restrictive in the Fed's eyes, that tells us that it is okay to have some longer duration in our portfolios and capture that. Especially as cash has come down and a good portion of the yield curve matches the yields of cash -- so we are getting some cash and carry in some of the sectors in fixed income, including the front end of the curve, including the intermediate part of the curve.
Key Takeaways:
Fed cut rates by 100 bp in 2024, prompting longer portfolio duration.
Fed pause likely persists into mid-2025, with a high bar for future hikes.
Rates remain restrictive, supporting longer duration strategies.
Yield curve matches cash yields, offering opportunities in both front-end and intermediate fixed income.
Q6 [10:18]: As we look ahead to the new year, what is your overall outlook for the fixed income market in 2025? How should investors consider positioning their portfolios to navigate potential rate movements, credit cycles, and macroeconomic uncertainties?
In terms of the fixed income market, one of the beauties of what happened in rates rising in the yield curve steepening is we do think the yield curve will continue to steepen. So that tells us there is a preferred habitat that maybe we should be investing in, and we think that's the intermediate part of the curve, zero to 10 years. Whereas I think there is still some risk in the longer part of the curve, 10 years and out, which did underperform in 2024. But still, if there is a yield curve steepening, the yield curve is about at 40 bp between two and 10 year securities. We think that could go to 100 bp, maybe over 100 bp. So there is still some steepening that could happen there. So what do you do in that environment? Well, I have already mentioned that there are some areas in fixed income that equal or better than cash markets right now. I do think moving out to the intermediate part of the curve, both in taxable and tax-exempt securities, depending on what strategy you are in. Tax-exempt strategies are on the expensive side right now, so we are in some of those portfolios, and we are even adding government bonds. But in terms of what we are doing with portfolios, we are neutralizing our duration but focusing on the intermediate part of the curve, which worked last year to an extent, not better than cash, but much better than longer duration securities, and we think that will continue to be the sweet spot for fixed income.
Key Takeaways:
Yield curve likely to steepen.
Intermediate maturities (0–10 years) are the sweet spot.
Neutralizing duration, but positioned toward intermediate bonds.
Tax-exempt markets are pricier, but still part of balanced portfolios.
Q7 [12:10]: Given the shifting economic landscape and policy environment, what final advice or key takeaways would you offer investors looking to balance yield opportunities with risk mitigation in 2025?
I think risk mitigation is a really good term given the fact that we have had two really good years in equity markets, in credit markets. We want people to look at and think about fixed income for what it does, and we have gotten back to that place where fixed income is a good hedge versus risk assets, at least, investment grade fixed income. Given the fact that municipal bonds are still relatively expensive and credit spreads are still pretty tight - the absolute yield level that fixed income is starting 2025 with gives people a great opportunity to say, "I can buffer any movements and the yield curve by getting this great income from the yield levels that are currently out there." We do think there's a great opportunity to add or keep your fixed income holdings within your asset allocations knowing that risk markets have had a few strong years. We have seen some volatility already and in the beginning of the year, we think fixed income will be a perfect place for asset allocations.
Key Takeaways:
Fixed income provides a good hedge against risk assets again.
Munis are pricey, and credit spreads remain tight, but yields provide a valuable income buffer.
Elevated yields create an opportunity to maintain or add fixed income for risk mitigation.
Note:
US Credit LUCRTRUU index from Bloomberg +2.03 for 2024
EM Bonds (us dem) LG20TRUU from Bloomberg +5.8% for 2024
US High Yield LF98TRUU from Bloomberg + 8.19%
Attached picture for curve at date of recording.
