Investors have pumped a record $600 billion into global bond funds this year, enjoying some of the highest returns in decades ahead of an uncertain 2025.
Falling inflation eventually allowed central banks to lower interest rates, causing investors to lock in the relatively high yields available and ultimately giving rise to the “year of the bond”, after $250 billion leaves fixed income funds in 2022.
“The story is about income,” said Vasiliki Pachatouridi, head of iShares fixed income strategy for EMEA at BlackRock. “We are seeing income being reinvested into fixed income funds. We haven’t seen these levels of returns in almost 20 years.
Bond yields tend to fall and prices rise when central banks reduce short-term borrowing costs.
Although returns on the ICE BofA World Bond Index have been average, around 2% this year, the yield on offer topped 4.5% at the end of last year, the highest since 2008.
As of mid-December, $617 billion had flowed into developed and emerging market bond funds, according to financial data provider EPFR, surpassing 2021’s $500 billion and putting 2024 on track for a record year.
Stocks, meanwhile, attracted $670 billion in inflows, with U.S. and European indexes hitting new highs. Cash-equivalent money market funds, which offer high returns and low risk, were the best performers, with more than $1 trillion.
THE CREDIT CRISIS
Corporate bonds, which offer higher yields than equivalent government bonds, have proven particularly popular, rallying as companies resisted rising interest rates from central banks.
The yield on the ICE BofA Global Corporate Bond Index fell to its lowest level relative to risk-free government debt since before the 2007 financial crisis.
“Before interest rates started to rise a few years ago, many companies locked in their financing for a useful period of time,” said Willem Sels, global chief investment officer at private bank HSBC.
“As a result, the impact of rising borrowing costs on businesses was much less than expected. In due course, many businesses gained more on their cash flow.”
PASSIVE AGGRESSIVE
Investors showed a clear preference for passive exchange-traded funds (ETFs), which were on track for a record year with $350 billion in inflows at the end of November, according to Morningstar Direct data.
“ETFs allow investors to access a number of assets that were previously more difficult to trade, including bonds,” says Martin Oehmke, professor of finance at the London School of Economics.
“Corporate bonds, for example, are notoriously illiquid and ETFs provide easy access to this market in a much more liquid form.”
The two biggest players in the passive fund market, BlackRock and Vanguard, have reaped the fruits of their labor.
BlackRock’s iShares ETF business attracted $111 billion in inflows between January and the end of October, according to Morningstar Direct estimates, while Vanguard raised about $120 billion, the vast majority of which went to its index business passive.
PIMCO, traditionally known for its active management, also had a strong year. It has attracted about $46 billion into its bond funds, according to Morningstar, after losing some $80 billion in 2022.
FLOWS COULD SLOW DOWN
A number of factors could cause inflows to slow in 2025. President-elect Donald Trump’s tax cut and deregulation agenda has caused U.S. stocks and capital flows into stocks to surge, limiting the attractiveness of obligations.
Data from EPFR and TD Securities shows $117 billion flowed into U.S. stock funds in the four weeks following Trump’s victory on Nov. 5, more than four times the $27 billion dollars invested in global bonds.
Moreover, investors doubt that corporate bonds can recover further after this year’s good performance.
“It seems very difficult to continue to expect spreads to tighten further, and I don’t believe bond yields will be much lower than today,” said Carl Hammer, global head of asset allocation to the Swedish bank SEB.
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