Bonds and 60/40 Portfolios See Strong Year in Markets
This year has proven to be exceptionally favorable for both stocks and bonds, with many markets approaching record highs. Despite ongoing inflation concerns, the bond market has also shown resilience. Recent data indicates an annual inflation rate of 2.8%, surpassing the Federal Reserve’s target of 2.0%. Factors such as President Trump’s tariffs have contributed to this inflation rise, yet bond investors have anticipated interest rate cuts, which the Fed implemented later in the year.
Bonds and 60/40 Portfolios See Strong Year in Markets
The bond market had a particularly good year, especially in the high-yield segment. The Morningstar US High Yield Bond Index reported a return exceeding 8%. Meanwhile, long-term Treasuries also performed well, projected to achieve returns above 5% by the end of the year. Overall, the Morningstar US Core Bond Index is forecasted to close 2025 up roughly 7%, marking the best annual performance for bonds since 2020.
Benefits for 60/40 Portfolios
2025 has been a positive year for investors who maintain diversified portfolios combining stocks and bonds. This investment strategy, often illustrated by the 60/40 stock-bond split, managed to yield solid returns for both asset classes. Following a difficult year in 2022—when the Morningstar US Moderate Target Allocation Index experienced a loss of 15.3%—2025 has reversed this trend. The index is expected to finish the year with a return of about 15%, down slightly from 2024’s 16.8% but significantly higher than the average return from 2005 to 2024.
The US Dollar’s Performance
Investors typically focus less on currency fluctuations, but 2025 saw a notable decline in the US dollar’s value. This weakening benefited non-US investments, particularly in emerging markets. The average fund within the Morningstar Diversified Emerging Markets category has seen growth nearing 30% this year. According to Hong Cheng, head of fixed income and currency research at Morningstar Investment Management, the factors contributing to the dollar’s decline, such as rising US debt and tariff-induced economic uncertainty, remain relevant.
Looking Ahead to the New Year
The upcoming holiday season is expected to lead to subdued trading volumes and quiet markets. Although New Year’s Eve will feature a full trading day for stocks, bond trading will conclude early. The next significant event on the investment calendar is the release of the December employment report, scheduled for January 9, 2026. This report is anticipated to provide clearer insights into the labor market and may influence the Fed’s potential interest rate decisions in January.
