Why Bonds Are a Smart Investment in 2025
Despite a challenging decade, bonds are showing signs of recovery. Here’s why you should consider adding them to your portfolio now.
BondsFixed IncomeInvestmentYieldsDividendReal Estate NewsJun 29, 2025
Real Estate News:Bonds have been hard to love in recent years—but they are getting easier to appreciate.
Over the past decade, bonds have barely mustered a 2% annual return, well behind the S&P 500’s 13%. This underperformance has led many individual investors and financial advisors to abandon the traditional 60/40 mix of stocks and bonds, opting for alternatives like real estate, private equity, or private credit.
However, take a look now. Despite all the knocks against them, bonds are having a decent year. Through late June, U.S. bonds were about even with the S&P 500, both generating returns of close to 4%. The outlook for the rest of 2025 looks promising, with the Federal Reserve poised to cut short-term rates by as much as half a percentage point and inflation running near 2%.
“Now is not the time to abandon fixed income,” writes Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management. She notes that bonds have generated respectable returns in 2025, despite “tariff-related inflation risk” and concerns about intractably high federal deficits.
Barron’s has long favored stocks for income due to their growth potential and generally low rates on bonds. However, there is a case for bonds now because the earnings yield of the S&P 500—the inverse of the price/earnings ratio—is now under 5%, comparable to the yield on long-term Treasuries and municipal bonds, and below those on mortgage securities, preferred stock, and junk bonds.
Bonds may not carry the lofty yields of the 1990s, when Treasuries yielded 6% to 7%, but rates are much better than they have been for most of the past decade. Treasuries now yield around 4%; municipals yield 3% to 5%; preferred stock yields 6% or more; mortgage securities yield 5.5%; junk bonds yield 7%; and cash, in the form of money-market funds and Treasury bills, now yield about 4%.
There are still pockets of yield throughout the stock market that comfortably exceed the 1.2% dividend rate on the S&P 500. Real estate investment trusts yield an average of 4%, energy pipelines yield 3% to 7%, and electric utilities about 3%.
At the start of 2025, Barron’s ranked foreign high-dividend paying stocks and U.S. equity high-yielders as the favorites in our annual survey of fixed income, and relegated preferred stock and municipal bonds to near the bottom. That call looks good so far, given the strength in international stocks and flattish returns in munis and some preferreds.
This represents an update based on first-half performance and the outlook for the next six months:
Tax-exempt bonds ranked near the bottom of returns in the fixed-income market during the first half of the year—but that offers a solid setup for the rest of 2025. Weighing on the muni market lately has been a heavy supply of new issues in the first half of June, but longer term, the outlook looks better. Single-A and double-A bonds now yield from 4.5% to 4.75%, just a touch below those on 30-year Treasury bonds at 4.85%. The tax-equivalent yield on those munis is over 7%.
“The underperformance has created attractive relative value,” says Anders Persson, CIO of global fixed income at Nuveen. Investors have favored exchange-traded funds like the $39 billion iShares National Muni Bond, but active managers can find value in the opaque and heterogenous $4 trillion market. Many individuals still prefer to buy individual municipal bonds and clip coupons. For residents of high-tax states like New York and California, consider long-term debt from the Los Angeles Department of Water and Power or Triborough Bridge and Tunnel Authority, which now yield about 4.75%.
Intermediate-term munis aren’t as appealing relative to Treasuries based on relative yields, but there is less rate risk. The $77 billion Vanguard Intermediate-Term Tax-Exempt fund yields about 3%. Non-investment-grade muni funds like the $13 billion Nuveen High Yield Municipal Bond fund now yield over 5%. There has been some concern that the tax bill making its way through Congress could curb the muni tax exemption. BofA analysts Yingchen Li and Ian Rogow wrote on Friday that they are optimistic the exemption will “survive” the negotiations between the House and Senate.
Dividend payers still look like a solid way to generate income. Right now, investors can get yields of 2.5% or more plus dividend growth and capital appreciation. Not all dividend strategies are created equal. The $60 billion Vanguard High Dividend Yield ETF has returned 4% this year, in line with the S&P 500. The $68 billion Schwab US Dividend Equity ETF, however, is down 1%, while the ProShares S&P 500 Dividend Aristocrats ETF, which owns companies with at least 25 years of annual dividend increases, is up 2%.
Healthcare stocks are worth a look for contrarian investors with the sector at its lowest relative level to the S&P 500 in 25 years. Among big stocks, Merck yields 4%, Pfizer, 7%, and UnitedHealth Group 3%. Hurt by tough consumer trends, food stocks have rarely been more disfavored and offer ample—and likely secure—yields. General Mills yields almost 5% and Kraft Heinz yields 6%, with both stocks near 52-week lows.
International high yielders came to life this year as overseas markets rallied and the dollar dropped. The trend likely has staying power following many years of underperformance relative to the U.S. Overseas companies favor dividends over stock buybacks, resulting in widespread 3%-plus dividends. Investors can do better. The Schwab International Dividend Equity ETF yields 4% while the iShares International Select Dividend ETF is at 5%, even after gaining 28% this year.
Pipelines do the boring work of transporting oil and natural gas from one place to another. But they also represent a backdoor play on the AI boom since they provide the fuel that generates the electricity to power data centers. Barron’s highlights Kinder Morgan in the current issue as a gas play that is cheaper than industry leader Williams Cos. Kinder Morgan yields 4%. More yield is available, however, in stocks like Enterprise Products Partners and Energy Transfer, which are structured as partnerships that generate cumbersome K-1 tax forms. The result is 7% yields on the pair, against 3% to 5% yields on corporate pipelines. The partnership-heavy Alerian MLP ETF yields 8%.
Regardless of the structure, pipelines often get too little attention from investors. “The sector continues to be under owned and underappreciated. It’s critical to the economy and AI,” says Rob Thummel, a senior portfolio manager at Tortoise Capital, which runs the Tortoise Energy Infrastructure closed-end fund. The fund now yields 10% and trades at a 7% discount to its net asset value. Large holdings include Williams, Targa Resources, and Energy Transfer.
Agency mortgage-backed securities offer the combination of nice yields and high credit quality. Fannie Mae and Freddie Mac mortgage issues now yield more than 5.5%, about 1.3 percentage points above the 10-year Treasury. That “spread” is now wider than the long-term average and compares with less than a percentage point yield pickup for high-grade corporates. The Simplify MBS ETF buys new mortgage issues and yields 6%, while the larger iShares MBS ETF, which holds a lot of lower-rate securities, yields 4%, but has more capital appreciation potential.
The DoubleLine Total Return Bond fund holds a mix of agency and higher-yielding nonagency issues that do carry some credit risk. Run by veteran manager Jeffrey Gundlach, the fund yields about 5.7%. Private real estate is attracting more interest from financial advisors, but there’s a strong case to be made for the public REITs, which offer some of the industry’s best assets and management teams, plus liquidity and transparency. The sector is flattish this year based on the total return of the Vanguard Real Estate ETF, which offers broad industry exposure and yields nearly 4%.
Though the apartment sector is in the red this year, it is expected to benefit in the coming years from reduced supply. Big operators like AvalonBay Communities, Mid-America Apartment Communities, and Equity Residential yield in the 3% to 4% range. Prologis, the leading warehouse owner, is trading close to where it was five years ago and yields almost 4%. Piper Sandler analyst Alexander Goldfarb is partial to SL Green Realty, which yields 5% and is one of the two leading New York office REITs. Its shares fell 6% this past week on concerns about the prospect of socialist Zohran Mamdani winning the mayoral election in November. Goldfarb likes SL Green’s focus on the hot market around Grand Central Terminal.
One popular area outside of traditional bonds are high-grade collateralized loan obligations, derivatives usually packaged out of junk-quality loans. They have produced higher returns than major bond indexes in recent years with higher credit quality. The Janus Henderson AAA CLO ETF, which yields 6%, has attracted $20 billion since its inception almost five years ago and produced 7% annual returns over the past three years, against 3% for the iShares Core U.S. Aggregate Bond ETF. The newer Nuveen AA-BBB CLO ETF dips down in credit quality and has a 6.5% yield.
The iShares Flexible Income Active ETF holds CLOs, as well as a raft of other asset classes with higher yields including junk debt, emerging market bonds, and commercial mortgage securities. Run by BlackRock’s head of fixed income Rick Rieder, it has returned 8% annually since its inception in 2023 and now yields over 6%.
The combination of yield, security, liquidity, and tax benefits has helped preferred stock gain a following among many income-oriented buyers. There are two main types of preferred: $25 par securities that generally trade on the NYSE or Nasdaq, and $1,000 par securities that mostly trade over the counter like bonds. The $25-par market, which is geared toward retail buyers, was richly priced at year-end, but has since gotten more reasonable after sufficient correction.
Over the past decade, bonds have barely mustered a 2% annual return, well behind the S&P 500’s 13%. This underperformance has led many individual investors and financial advisors to abandon the traditional 60/40 mix of stocks and bonds, opting for alternatives like real estate, private equity, or private credit.
However, take a look now. Despite all the knocks against them, bonds are having a decent year. Through late June, U.S. bonds were about even with the S&P 500, both generating returns of close to 4%. The outlook for the rest of 2025 looks promising, with the Federal Reserve poised to cut short-term rates by as much as half a percentage point and inflation running near 2%.
“Now is not the time to abandon fixed income,” writes Lisa Shalett, chief investment officer of Morgan Stanley Wealth Management. She notes that bonds have generated respectable returns in 2025, despite “tariff-related inflation risk” and concerns about intractably high federal deficits.
Barron’s has long favored stocks for income due to their growth potential and generally low rates on bonds. However, there is a case for bonds now because the earnings yield of the S&P 500—the inverse of the price/earnings ratio—is now under 5%, comparable to the yield on long-term Treasuries and municipal bonds, and below those on mortgage securities, preferred stock, and junk bonds.
Bonds may not carry the lofty yields of the 1990s, when Treasuries yielded 6% to 7%, but rates are much better than they have been for most of the past decade. Treasuries now yield around 4%; municipals yield 3% to 5%; preferred stock yields 6% or more; mortgage securities yield 5.5%; junk bonds yield 7%; and cash, in the form of money-market funds and Treasury bills, now yield about 4%.
There are still pockets of yield throughout the stock market that comfortably exceed the 1.2% dividend rate on the S&P 500. Real estate investment trusts yield an average of 4%, energy pipelines yield 3% to 7%, and electric utilities about 3%.
At the start of 2025, Barron’s ranked foreign high-dividend paying stocks and U.S. equity high-yielders as the favorites in our annual survey of fixed income, and relegated preferred stock and municipal bonds to near the bottom. That call looks good so far, given the strength in international stocks and flattish returns in munis and some preferreds.
This represents an update based on first-half performance and the outlook for the next six months:
Tax-exempt bonds ranked near the bottom of returns in the fixed-income market during the first half of the year—but that offers a solid setup for the rest of 2025. Weighing on the muni market lately has been a heavy supply of new issues in the first half of June, but longer term, the outlook looks better. Single-A and double-A bonds now yield from 4.5% to 4.75%, just a touch below those on 30-year Treasury bonds at 4.85%. The tax-equivalent yield on those munis is over 7%.
“The underperformance has created attractive relative value,” says Anders Persson, CIO of global fixed income at Nuveen. Investors have favored exchange-traded funds like the $39 billion iShares National Muni Bond, but active managers can find value in the opaque and heterogenous $4 trillion market. Many individuals still prefer to buy individual municipal bonds and clip coupons. For residents of high-tax states like New York and California, consider long-term debt from the Los Angeles Department of Water and Power or Triborough Bridge and Tunnel Authority, which now yield about 4.75%.
Intermediate-term munis aren’t as appealing relative to Treasuries based on relative yields, but there is less rate risk. The $77 billion Vanguard Intermediate-Term Tax-Exempt fund yields about 3%. Non-investment-grade muni funds like the $13 billion Nuveen High Yield Municipal Bond fund now yield over 5%. There has been some concern that the tax bill making its way through Congress could curb the muni tax exemption. BofA analysts Yingchen Li and Ian Rogow wrote on Friday that they are optimistic the exemption will “survive” the negotiations between the House and Senate.
Dividend payers still look like a solid way to generate income. Right now, investors can get yields of 2.5% or more plus dividend growth and capital appreciation. Not all dividend strategies are created equal. The $60 billion Vanguard High Dividend Yield ETF has returned 4% this year, in line with the S&P 500. The $68 billion Schwab US Dividend Equity ETF, however, is down 1%, while the ProShares S&P 500 Dividend Aristocrats ETF, which owns companies with at least 25 years of annual dividend increases, is up 2%.
Healthcare stocks are worth a look for contrarian investors with the sector at its lowest relative level to the S&P 500 in 25 years. Among big stocks, Merck yields 4%, Pfizer, 7%, and UnitedHealth Group 3%. Hurt by tough consumer trends, food stocks have rarely been more disfavored and offer ample—and likely secure—yields. General Mills yields almost 5% and Kraft Heinz yields 6%, with both stocks near 52-week lows.
International high yielders came to life this year as overseas markets rallied and the dollar dropped. The trend likely has staying power following many years of underperformance relative to the U.S. Overseas companies favor dividends over stock buybacks, resulting in widespread 3%-plus dividends. Investors can do better. The Schwab International Dividend Equity ETF yields 4% while the iShares International Select Dividend ETF is at 5%, even after gaining 28% this year.
Pipelines do the boring work of transporting oil and natural gas from one place to another. But they also represent a backdoor play on the AI boom since they provide the fuel that generates the electricity to power data centers. Barron’s highlights Kinder Morgan in the current issue as a gas play that is cheaper than industry leader Williams Cos. Kinder Morgan yields 4%. More yield is available, however, in stocks like Enterprise Products Partners and Energy Transfer, which are structured as partnerships that generate cumbersome K-1 tax forms. The result is 7% yields on the pair, against 3% to 5% yields on corporate pipelines. The partnership-heavy Alerian MLP ETF yields 8%.
Regardless of the structure, pipelines often get too little attention from investors. “The sector continues to be under owned and underappreciated. It’s critical to the economy and AI,” says Rob Thummel, a senior portfolio manager at Tortoise Capital, which runs the Tortoise Energy Infrastructure closed-end fund. The fund now yields 10% and trades at a 7% discount to its net asset value. Large holdings include Williams, Targa Resources, and Energy Transfer.
Agency mortgage-backed securities offer the combination of nice yields and high credit quality. Fannie Mae and Freddie Mac mortgage issues now yield more than 5.5%, about 1.3 percentage points above the 10-year Treasury. That “spread” is now wider than the long-term average and compares with less than a percentage point yield pickup for high-grade corporates. The Simplify MBS ETF buys new mortgage issues and yields 6%, while the larger iShares MBS ETF, which holds a lot of lower-rate securities, yields 4%, but has more capital appreciation potential.
The DoubleLine Total Return Bond fund holds a mix of agency and higher-yielding nonagency issues that do carry some credit risk. Run by veteran manager Jeffrey Gundlach, the fund yields about 5.7%. Private real estate is attracting more interest from financial advisors, but there’s a strong case to be made for the public REITs, which offer some of the industry’s best assets and management teams, plus liquidity and transparency. The sector is flattish this year based on the total return of the Vanguard Real Estate ETF, which offers broad industry exposure and yields nearly 4%.
Though the apartment sector is in the red this year, it is expected to benefit in the coming years from reduced supply. Big operators like AvalonBay Communities, Mid-America Apartment Communities, and Equity Residential yield in the 3% to 4% range. Prologis, the leading warehouse owner, is trading close to where it was five years ago and yields almost 4%. Piper Sandler analyst Alexander Goldfarb is partial to SL Green Realty, which yields 5% and is one of the two leading New York office REITs. Its shares fell 6% this past week on concerns about the prospect of socialist Zohran Mamdani winning the mayoral election in November. Goldfarb likes SL Green’s focus on the hot market around Grand Central Terminal.
One popular area outside of traditional bonds are high-grade collateralized loan obligations, derivatives usually packaged out of junk-quality loans. They have produced higher returns than major bond indexes in recent years with higher credit quality. The Janus Henderson AAA CLO ETF, which yields 6%, has attracted $20 billion since its inception almost five years ago and produced 7% annual returns over the past three years, against 3% for the iShares Core U.S. Aggregate Bond ETF. The newer Nuveen AA-BBB CLO ETF dips down in credit quality and has a 6.5% yield.
The iShares Flexible Income Active ETF holds CLOs, as well as a raft of other asset classes with higher yields including junk debt, emerging market bonds, and commercial mortgage securities. Run by BlackRock’s head of fixed income Rick Rieder, it has returned 8% annually since its inception in 2023 and now yields over 6%.
The combination of yield, security, liquidity, and tax benefits has helped preferred stock gain a following among many income-oriented buyers. There are two main types of preferred: $25 par securities that generally trade on the NYSE or Nasdaq, and $1,000 par securities that mostly trade over the counter like bonds. The $25-par market, which is geared toward retail buyers, was richly priced at year-end, but has since gotten more reasonable after sufficient correction.
Frequently Asked Questions
Why have bonds underperformed in recent years?
Bonds have underperformed in recent years due to low yields and the strong performance of the stock market, particularly the S&P 500, which has seen annual returns of around 13%.
What is the current outlook for bonds in 2025?
The outlook for bonds in 2025 is positive, with the Federal Reserve expected to cut short-term rates and inflation running near 2%, making bonds more attractive in terms of yields and relative value.
What are some alternatives to traditional bonds?
Alternatives to traditional bonds include real estate, private equity, private credit, and high-yield municipal bonds, which offer higher yields and diversification.
What are the benefits of investing in municipal bonds?
Municipal bonds offer tax-exempt yields, which can be particularly attractive for high-tax states. They also provide a stable income stream and are generally considered low-risk.
How can dividend-paying stocks complement a bond portfolio?
Dividend-paying stocks can provide a steady income stream and potential for capital appreciation, complementing the fixed income generated by bonds and diversifying the overall portfolio.
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