Bond investing in 2025: Keep duration short and look for quality

LAST year, short-duration bonds trumped long-duration securities amid a normalisation of the yield curve, with short-end yields falling by less than initial market expectations, and long-end yields climbing significantly.

Meanwhile, high-yield bond markets outshone their investment-grade counterparts, helped by their shorter duration exposure and continued spread tightening.

For 2025, we continue to advocate a shorter-duration exposure in your portfolio, as investors can continue earning attractive yields here without incurring excessive duration risks. We also prefer higher-quality bonds such as investment-grade ones with attractive yields without going too far down the credit spectrum.

Preference for short duration

In September 2024, the US Federal Reserve cut policy rates by 50 basis points, and markets expected massive rate cuts ahead, with the forecast of end-2025 policy rates at around 3 per cent. At that time, we believed these expectations were too optimistic; we were eventually proven correct, and markets are now pricing in terminal rates at around 4 per cent instead.