Will bonds still be the word in 2025?

Corporate fund raising also saw a flurry of activity over recent years. In the UK alone, the London Stock Exchange has reported more than 21,000 debt instruments listed on its markets.

But as inflation - sticky as it is - eventually comes down and geopolitical tensions escalate, how attractive will fixed income be in the months and year ahead?

Will allocators prefer short, medium or long-dated bonds, and what will investors make of paying too much coin for too little cushion the higher up the risk curve they go?

Michael Metcalfe, head of macro strategy, state global markets at State Street, says long-term investor positioning in sovereign fixed income markets has “been less optimistic, but is revealing”.

He points to the fact that demand for French sovereign bonds slumped to a six-month low in November, ahead of the collapse of the French government and the departure of prime minister Michel Barnier.

Analysis by State Street reveals investors are still largely risk-on, preferring equity exposure over fixed income and high yield over lower-yielding bonds.

He points out: “Investors remain overweight in other high debt countries in the Euro area, such as Italy.”

Risk on, risk off

Liam Moore, investment specialist in the global fixed income, currency and commodities team at JPMorgan, agrees there still appears to be a ‘risk off’ attitude in markets, which will keep fixed income in favour, but investors need to choose their bond allocation carefully.

He explains: “Fixed income markets have been grappling with the uncertainty around which policies will be implemented by the next US administration, and their potential impact on inflation and the US deficit.

“Combined with mixed signals coming from the labour market and an easing of central bank policy, this has kept government bond yields broadly rangebound.”

During 2024, UK government bonds - gilts - were range-bound between 3.8 per cent and 4.5 per cent.

Should short-term rates fall significantly, this could entice investors out of allocations in money market funds and back into bond markets

Liam Moore, JPMorgan Asset Management

Over the course of the year, especially after the Budget in October, there was a big sell off of 10-year gilts sold over the concern of an additional £28bn a year in borrowing, and the pound fell to a two-month low against the US dollar.

It should be remembered that the UK bond market represents only 4 per cent of the global market. Investors can access more diversification by taking a global approach.