Bonds have underperformed. Why you should own them now.

Mint

29-06-2025

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%. And with their struggles, the asset class has found itself fighting for a place in portfolios as many individual investors and financial advisors abandon the traditional 60/40 mix of stocks and bonds and substitute alternatives like real estate, private equity or private credit for all or part of the fixed-income allocation.
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 as both were generating returns of close to 4%. And the outlook for the rest of 2025 looks good 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, who notes that bonds have generated respectable returns in 2025, despite what she calls 'tariff-related inflation risk" as well as pervasive concerns about intractably high federal deficits.
Barron's has long favored stocks for income because of their growth potential, and generally low rates on bonds. But 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 with 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 way better than they have been for most of the past decade.
Treasuries now yield around 4%; municipals yield 3% to 5%; preferred stock yield 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, 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%.
Kinder Morgan, like most U.S. pipelines, is a corporation. 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 including 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 suffering a 1% loss including reinvested dividends based on the iShares Preferred and Income Securities ETF.
Banks are the major issuers in the $300 billion market and their $25-par issues now yield around 6%. Consider preferreds with below-market dividends of 4% to 5% since those offer more upside potential if rates fall.
Another bonus: Most preferred dividends are taxed like common stocks at a top federal rate of 20%, while corporate bond interest is taxed at income-tax rates.
For those comfortable with Bitcoin, there are three high-rate preferreds from Bitcoin holder MicroStrategy, including the recent deal known as STRD for its ticker now yielding 11.5%.
Doomsayers assert reduced foreign demand and the prospect of $2 trillion annual budget deficits will inevitably lead to higher rates on government bonds. But the Treasury market has held up well this year and the reason could be relatively high yields relative to the 2% inflation rate.
The yield on the benchmark 10-year Treasury note is down about a quarter percentage point to 4.30% this year, resulting in a total return of 5% on the iShares 7-10 Treasury Bond ETF.
Long-term Treasury yields at around 4.85% are slightly higher this year and the result is that the popular iShares 20+ Year Treasury Bond ETF has returned just 2%.
Barron's wrote recently that Treasury inflation-protected securities, or TIPS, are a good alternative to regular Treasuries. They sport break-even yields of around 2.30%, meaning that if inflation runs higher than that, investors will do better in TIPS versus run-of-the-mill Treasuries.
The best value in TIPS are 30-year securities offering a real, or inflation-adjusted, yield of 2.5%. The big iShares TIPs ETF, has an average maturity of around seven years, while the Pimco 15+ Year U.S. TIPS Index ETF offers exposure to the longer end of the market.
Cash isn't just a parking place. It's an asset class and an alternative to bonds for risk-averse investors.
Money-market funds and Treasury bills now yield around 4%, exceeding the inflation rate by about two percentage points. The challenge is that short rates are likely headed lower. But even a half-point drop by year-end would still leave cash yields in the 3.5% to 3.75% range.
T-bill ETFs are a good alternative to money-market funds because of higher yields, high credit quality, monthly income and generally lower fees. T-bill ETFs have sucked in a record amount of cash this year as individuals emulate Berkshire Hathaway CEO Warren Buffett who has put over $300 billion of the company's cash into T-bills and holds virtually no bonds. The $50 billion iShares 0-3 Month Treasury Bond ETF yields about 4.2% and has an expense ratio of just 0.09%.
Investors can buy Treasury bills at weekly auctions through the TreasuryDirect website and banks and brokers. The six-month T-bills to be auctioned Monday will mature in early January, allowing holders to defer paying taxes on the interest income until 2027 since T-bill interest is paid at maturity.
Write to Andrew Bary at [e-mail]