Bonds Gain Appeal as Stocks Struggle

Investors are reconsidering bonds and other debt assets as share markets take a hit. Traditionally viewed as safer than stocks, bonds had a rough few years, with disappointing returns in 2022, 2023 and 2024. Despite this, recent market conditions make them an attractive alternative for those seeking stability.

The performance of bonds last year lagged behind shares and even cash deposits. Australian shares rose 11%, global shares gained 21%, and basic savings in banks returned 4.5%. In contrast, Australian and global bonds delivered 2.9% and 2.2%, respectively, falling from 5.3% the previous year.

Financial experts suggest bond returns may improve in 2025, with forecasts around 4 per cent. However, uncertainty looms. Potential trade tensions from the US could drive inflation higher, impacting bond yields. If inflation spikes, interest rates on bonds could rise - reducing bond values and investor returns.

Looking ahead, experts advise diversifying income sources rather than relying solely on bonds or cash. Alternative assets, such as private credit and listed infrastructure, offer additional income streams. The growing market for bond ETFs and private debt gives investors more ways to access stable, yield-generating investments. However, some smaller credit providers are facing high default rates, signalling the need for caution.

Source: The Australian, Morgan Stanley, Vanguard