2024: The Year of the Bond

In 2024, investors have made a remarkable move by investing over $600 billion into global bond funds. This surge comes as they take advantage of some of the highest yields seen in decades, all while facing the uncertainty of what 2025 might hold.

With inflation on the decline, central banks have been given the opportunity to lower interest rates. This shift has encouraged many investors to lock in the relatively high yields that are now available, marking 2024 as the true "year of the bond.” This is a significant reversal from 2022, when $250 billion exited fixed-income funds.

Vasiliki Pachatouridi, who leads the EMEA iShares fixed income strategy at BlackRock, commented, "The story is income. We are seeing the income being put back into fixed income. We haven’t seen these levels of yields in almost 20 years.”

As central banks reduce short-term borrowing costs, bond yields generally fall and prices rise. Despite returns on the ICE BofA global bond index being relatively modest at about 2% this year, yields had reached over 4.5% late last year—the highest since 2008.

As of mid-December, a total of $617 billion had flowed into both developed and emerging market bond funds, according to EPFR. This figure surpasses the $500 billion inflow recorded in 2021, setting 2024 up to be a record-breaking year.

In contrast, equities have attracted $670 billion in inflows as stock indexes in the US and Europe continue to reach new highs. Cash-equivalent money market funds, known for their high yields and low risks, have been the biggest winners, drawing in over $1 trillion.

The Corporate Bond Boom

Corporate bonds, which provide higher yields compared to similar government securities, have gained significant popularity. This trend continues as companies have managed to adapt to the rising interest rates set by central banks.

The yield on the ICE BofA global corporate bond index has decreased to its lowest point against risk-free government debt since before the financial crisis in 2007. Willem Sels, the global chief investment officer at HSBC’s private bank, noted the impact of companies securing long-term funding before interest rates began to rise. He stated, "Therefore, the impact of rising borrowing costs on corporates was much less than people expected. At the same time, a lot of companies earned more on their cash holdings.”

Shift Towards Passive Investments

This year has also witnessed a significant shift towards passive investment strategies, particularly in exchange-traded funds (ETFs). According to Morningstar Direct data, passive ETFs are on track for a record year with $350 billion in inflows by the end of November.

As Martin Oehmke, a professor of finance at the London School of Economics, explains, "ETFs give investors access to a number of assets that previously were harder to trade, including bonds. Corporate bonds, for example, are notoriously illiquid, and ETFs offer easy access to this market in a much more liquid form.”

The two largest players in the passive fund sector, BlackRock and Vanguard, have greatly benefited from this trend. BlackRock’s iShares fixed income ETF division attracted $111 billion in inflows from January to the end of October this year. Meanwhile, Vanguard's bond funds received an estimated $120 billion, predominantly directed to its index business, which also includes ETFs.

PIMCO, a firm traditionally known for its active management style, has also enjoyed a successful year, bringing in approximately $46 billion to its bond funds after experiencing a loss of about $80 billion in 2022.

Looking Ahead: Potential Slowdown

Despite the strong inflows seen in 2024, several factors could slow this trend in 2025. The election of President Donald Trump and his focus on tax cuts and deregulation has sparked a surge in US stock prices, resulting in increased investment in equities. Recent data indicates that $117 billion flowed into US stock funds in the four weeks post Trump's election—more than four times the $27 billion that went into global bonds during the same period.

Additionally, some investors express skepticism about the potential for corporate bonds to continue to rally after such strong performances this year. Carl Hammer, global head of asset allocation at SEB, remarked, "It seems very hard to continue to expect spreads to tighten much more, and I don’t believe that bond yields will be much lower from where we are today."

investors, bonds, yields