Core Insights - The bond market in 2025 is experiencing a cautious recovery as the Federal Reserve enters an easing cycle, with long rates around 4% and a positive term premium [1][3][4] - The U.S. government is set to issue approximately $1 trillion in Treasury bonds, which may create upward pressure on yields despite rate cuts [1][4] - High-yield defaults are projected to remain elevated at around 3-5% in 2025, indicating ongoing credit stress but not an accelerating trend [4] Market Performance - Year-to-date performance for various bond indices includes Long Treasuries (TLT) at approximately +8%, Core U.S. bonds (AGG) at +7-8%, and Investment Grade credit (LQD) at +9% [3] - The 2-year yield is around 3.48%, the 10-year yield is approximately 4.02%, and the 30-year yield is about 4.59% [3] Economic Context - The bond market is recovering from a significant drawdown from 2020 to 2024, often referred to as the worst Treasury bear market on record [3] - The current environment is characterized as a healing year rather than one of rapid price gains in long-duration bonds [3] Supply and Demand Dynamics - Increased issuance of long-end Treasury bonds is leading to higher yield demands from investors [4] - The balance of supply and demand, including potential foreign buyer pullbacks, will influence U.S. Treasury yields [9] Investment Strategy - Bonds are regaining their role in diversified portfolios, offering meaningful income and acting as a counterweight to equities [12] - A modern portfolio strategy may include a 60/30/10 allocation, emphasizing flexibility in response to higher inflation risks and evolving monetary policies [26][31] Global Comparisons - International bond yields include the 10-year German Bund at approximately 2.6% and the 10-year UK Gilt at around 4.4%, reflecting different monetary policy stances [8] - Japan's 10-year JGB yield is about 1.65%, with the Bank of Japan normalizing its bond purchases [8] Conclusion - The bond market landscape in 2025 is dynamic, with a focus on steady income, portfolio balance, and real return potential [32][34] - Investors are encouraged to adopt a disciplined approach to bond investing, emphasizing diversification across maturities and credit quality [33][34]