Is Now A Good Time For Fixed-Income Investing? What Experts Are Saying

Forbes

22-05-2025

Fixed income investors who take a disciplined, diversified approach should be rewarded with nice ... More returns with relatively low risk.
Attractive yields in fixed income have many investors wondering if now's the time to add to their income portfolios. Find out now what experts are saying about fixed-income investing in 2025.
Fixed-income investments include bonds, bills, notes, collateralized debt obligations (CLO) and certificates of deposit (CD). These investments pay interest over time, and then repay the principal—your initial investment—at a specified maturity date.
Many investors add fixed-income securities to their portfolio for income and stability. The income is consistent unless the security has a floating rate or the issuer defaults on the interest payments. Fixed-income pricing can rise or fall, but these moves are generally less dramatic than stocks. The relative price stability comes in part from fixed repayment terms.
Investors should know that fixed-income securities with fixed coupon rates lose value when interest rates rise and appreciate when interest rates fall.
Fixed-income investing is back in the spotlight because interest rates remain elevated and many expect more volatility in the stock market this year.
Fixed-income yields remain historically high, even though the Fed lowered interest rates three times last year. Before the April 2 tariff announcements that sent the stock market spinning, a report from John Hancock Investment Management predicted short-term yields would decline throughout 2025 while longer-term rates could remain elevated. After the tariff announcement, a report from Nueberger Berman noted opportunities in short-term instruments and concerns about longer maturities.
Interviews with experts also revealed selective optimism for fixed income.
The primary benefits of fixed-income securities are stability, income generation and diversification.
Fixed-income securities are predictable in that interest payment cadence and repayment timelines should not change. Securities with a fixed interest rate will also deliver predictable income unless the issuer defaults. Default is less likely for issuers with high credit ratings.
Fixed-income securities pay interest. At current yields above 4%, the income yield is higher than premium dividend stocks. Dividends have the added benefit of appreciation potential, but that comes with price volatility. While fixed-income securities are price-sensitive to interest rate changes, they can also show strength when stock prices falter.
Fixed-income securities behave differently than stocks, which makes them an attractive role player within a portfolio. An equity-only portfolio is typically very volatile. Many investors dilute that volatility by diversifying investments into fixed income. Combining these two asset classes in different quantities allows investors to customize the portfolio's risk, income generation and appreciation potential.
Fixed-income investments have a reputation for being safer than stocks, but there are risks ranging from interest rate risk to liquidity risk.
Interest rate risk is the potential for fixed-income securities to lose value when interest rates rise.
The price declines occur to bring outstanding fixed-income securities in line with investors' yield expectations. As an example, a 4% bond will be less appealing if market rates rise to 5%. The market value of that 4% bond will fall as a result, which increases the yield-to-maturity to be more competitive with newly issued 5% bonds.
Inflation risk is the potential for rising prices to reduce the buying power of interest payments. Because of inflation, the income generated from a 10-year bond will always be less valuable at the bond's maturity than it was at issuance. For context, it takes $1.36 today to equal the purchasing power of $1 in May 2015.
This risk is particularly hard to manage for investors who use interest income to pay bills.
Credit risk refers to the possibility that the interest and principal will not be repaid to investors as agreed.
Most fixed-income securities have credit ratings that indicate the issuer's ability to repay. Higher-rated securities carry lower coupon rates because their credit risk is lower, according to credit rating agencies. This is why U.S. Treasury securities have lower yields than corporate bonds and junk bonds.
Rosenstrock recommends opting for higher-rated securities when the economic outlook is uncertain. "A recession would mean that higher-risk fixed-income categories, including high-yield bonds, could significantly underperform their higher-quality counterparts," he explains.
Shahin cites policy volatility as a new risk for fixed-income investors to consider in 2025. Dramatic U.S. policy changes affecting taxes, tariffs and immigration could trigger inflation, recession or both. In this environment, it is challenging to predict fixed-income yields and performance. A cautious approach is warranted.
Reinvestment risk is the possibility that an investment's proceeds will earn less than the original investment. For example, if bond rates fall, investors will have to reinvest the interest and principal payments at lower rates.
Michael Rodriguez, CFP with Equanimity Wealth, advises investors to consider reinvestment risk in their strategy. Bond laddering is a popular mitigation approach. Laddering involves purchasing bonds with staggered maturity dates to spread out principal repayments.
Liquidity risk is the possibility of missing financial obligations because assets cannot be sold without incurring huge losses. In an increasingly interconnected global economy, liquidity crises can spread rapidly—as was the case in the 2007-2008 financial crisis. To protect against liquidity risk, investors can shore up cash reserves so they're not dependent on asset sales.
Interest rates and fixed-income prices have an inverse relationship. When interest rates rise, fixed-income values fall. New issues will carry the higher rates, while existing fixed-income securities will be repriced lower.
Rising rates could be a factor for fixed-income investors if inflation takes off again. The Fed would likely raise interest rates in response.
The latest inflation report shows prices grew more slowly than expected in April, despite predictions that tariffs will fuel inflation.
Now is a good time to lock in higher yields for the next several years through fixed-income investments. However, given the economic uncertainty, investors should proceed with caution. Diversifying maturity dates and issuers while prioritizing credit quality are key strategies for 2025.
Fixed-income interest payments are usually taxable as ordinary income in the year they are earned. Long-term or short-term taxable capital gains can also result from selling fixed-income securities at a profit or investing in fixed-income funds.
Two strategies can mitigate the tax burden of fixed-income investing. Investors can hold the income securities within a tax-deferred account such as an IRA or 401(k). Or, investors can opt for tax-advantaged securities like municipal bonds and U.S. Treasury securities. Municipal bonds may be exempt from state and federal taxes, while U.S. Treasuries are exempt from state and local taxes.
Mistakes fixed-income investors can make today include over-prioritizing long-term bonds, chasing yields and underestimating liquidity risk.
Bottom Line
In 2025, fixed-income investments can deliver higher yields for the next five to seven years. That's appealing in a time when stock prices are especially reactive. Investors who take a disciplined, diversified approach should be rewarded with nice returns with relatively low risk.
ETFs that invest in U.S. Treasury securities with varied maturities are accessible and relatively low risk for beginner investors. CDs are another option; these are FDIC-insured, fixed-term deposits at banks.
Tariffs can impact fixed-income investing if they stress the economy or change the business outlook for bond issuers.
Fixed-income portfolios can beat equity portfolios over the long term, but not without the same or higher risk levels, according to a report from the Knowledge at Wharton business journal.
A certificate of deposit or CD is the safest fixed-income investment today.