Bond investments reap gains in 2025, despite risks

Despite worries about U.S. government deficits and debt, a bubble from overvalued stocks and other risks, bond investors enjoyed a solid year.

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Fixed-income securities both “diversified and delivered,” Dan Lefkovitz, a strategist for research and benchmarking firm Morningstar Indexes, wrote earlier this month — just one way capital markets surprised investors in 2025. Federal budgets, inflation and the “expectations of a free-spending administration” in the White House had given investors “so many reasons to stay out of bonds,” Lefkovitz said. But the more than 7% gain in 2025 in the Morningstar U.S. Core Bond Index for basic fixed-income investors, alongside an increasing array of actively managed products, explain experts’ sunny outlooks.

“Even more impressive than the return is how well bonds held up during the equity market selloff in spring 2025,” Lefkovitz wrote. “As the stock market flirted with bear-market territory, bonds performed exactly how you would hope — providing crucial portfolio ballast. From an income standpoint, the Morningstar U.S. Core Bond Index throws off a yield of 4.25%, comfortably above the inflation rate. My colleagues on Morningstar’s investment management team continue to view a U.S. core bond allocation as offering an attractive risk/reward profile. The ‘sweet spot,’ in their view, lies in intermediate-term maturities. As ever, income investors are cautioned against reaching too far for yield into lower-quality debt.”

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New products on the shelf

A brief credit scare in October underscored those risks. But the overall positive landscape for bonds — along with ETF innovations that tap into options trades like box spreads — is fueling more borrowing and debt-tied investment vehicles, according to Brian Jacobs, a portfolio manager and investment strategist with asset management firm Aptus Capital Advisors. In May, his firm launched the Aptus Deferred Income ETF (ticker: DEFR), which seeks to outperform the Bloomberg U.S. Aggregate Bond Index through fixed-income exposure with options and a design that delays taxable distributions and reduces the accompanying payments to Uncle Sam.

With the traditional exception of municipal bonds, U.S. Treasury bills and other fixed-income products deliver returns that are primarily tied to coupons with distributions to investors that are “taxed at the highest short-term rate,” Jacobs noted. The Aptus product pushes back those taxable distributions by realizing the gains within its structure until the investor can get the lower, long-term capital gains rates or offset them with other losses. In a September blog called, “Turning $1.85 in Taxes Into a Nickel (for the Same Distribution),” Jacobs laid out the firm’s strategy with DEFR, which is actively managed and charges an expense ratio of 0.79%. 

“The investor regains control over when it’s distributed,” he said. “It massively reduces the taxes for investors.”

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Looking ahead to 2026

Regardless of the product, the economy looks “broadly supportive for fixed income in 2026,” even though there are signs that “will demand vigilance,” according to an outlook report for bonds next year by Alex Veroude, the head of fixed income with asset management firm Janus Henderson Investors. The risks highlighted by the collapse of car parts supplier First Brands and subprime auto lender Tricolor show why “robust deal structuring should be top of mind, together with rigorous oversight and transparency,” rather than a harbinger of “systemic problems with private credit,” Veroude wrote. 

“U.S. rate cuts and subdued inflation should broadly support fixed income, but scrutiny over policy motives will shape yield curve dynamics,” he wrote in the three key takeaways from the report. “We think corporate bond yields remain attractive, but investors should monitor historically tight credit spreads and the impact of increased AI-driven debt issuance on supply dynamics. Securitised assets and private credit can provide diversification, high credit quality, and income potential, which in our view makes them a strategic consideration for resilient portfolios.”

Against that positive if somewhat murky backdrop, financial advisors and their clients could find value next year in both the core and newer bond vehicles.

“Through the options market there are now innovative ways where you can replicate the returns of bonds but not own actual bonds,” Jacobs said. “Investors often demand yield, and they often demand income and these funds do not have income for tax reasons. … We love the fact that it’s a new category.”