2024 Bond Market Review
Three key takeaways from a review of the 2024 bond market performance.
As we look back on 2024, we see that the early anticipation of multiple rate cuts, lingering recession fears and election uncertainty quickly turned to hawkish Fed rhetoric late in the year – fading hopes of deep cuts in overnight rates and a potentially more inflationary, stronger-growth environment in Trump’s second term. During the fourth quarter of 2024, persistent inflation and a renewed focus on U.S. debt levels pushed bond yields up and bond prices down. While the Fed did lower its overnight rate by 100 basis points late in the year, expectations for the Fed Funds rate in 2025 changed significantly – now, just a one-quarter point cut is priced in for 2025, and terminal-rate expectations have risen by roughly 75 basis points since September’s Fed meeting. The 10-year Treasury yield finished 2024 at 4.57% after beginning the year at 3.88%.
Yield Curve Normalization
Since early 2022, an unusual yield curve environment lingered, where two-year Treasury securities traded with more yield than 10-year Treasury bonds. (In a normal environment, short-term securities trade with lower yields than longer maturities.) But late in 2024, as economic data remained firm and inflation prints continued above 2%, the Treasury curve finally normalized, and the 10-year Treasury yield rose solidly above the two-year Treasury level. Further, in mid-December, short Treasury bill yields dropped below that of the 10-year U.S. Treasury note for the first time in nearly three years, another indication of the yield curve normalizing.
Heavy Issuance Expected Going Forward Into 2025
As 2024 drew to a close, market consensus called for strong upcoming bond issuance in the municipal, corporate and U.S. Treasury markets. And not even one week into 2025, we have seen Ford, General Motors, Toyota, Caterpillar, John Deere and several banks tap the U.S. bond market for large, multibillion-dollar new-issue bond deals. Investment-grade syndicate desks are expecting issuance to be near $200 billion in January alone, which would set a new record.
Positive Returns Continue Despite a Rebound in Rates
For the full year 2024, the Bloomberg Intermediate Gov/Credit bond benchmark returned an even 3%, adding to 2023’s return of 5.24% and continuing the rebound from 2022’s record negative return of -8.23%. Table 1 below provides a useful summary of various bond benchmark returns.
Table 1. Recent and Longer-Term Bond Returns. Total return in %.
| Bond Benchmark | Average Annual Return Since 1980* | Avg Annual Return Since 2000 | 2020 Full-Year Return | 2021 Full-Year Return | 2022 Full-Year Return | 2023 Full-Year Return | 2024 Full-Year Return |
| U.S. Intermediate Gov/Credit | 6.31 | 3.74 | 6.42 | (1.44) | (8.23) | 5.24 | 3.00 |
| U.S. Aggregate | 6.69 | 3.93 | 7.49 | (1.54) | (13.01) | 5.53 | 1.25 |
| U.S. Municipal Tax-Exempt | 5.94 | 4.22 | 5.20 | 1.52 | (8.53) | 6.40 | 1.05 |
| ICE BofA 0-3 Month U.S. T-Bill | n/a | 1.84 | 0.54 | 0.05 | 1.53 | 5.10 | 5.30 |
*Annualized returns since Jan. 31, 1980.
Source: Bloomberg LLC, Baird Trust.
From the table we can see that Treasury bills returned 5.30% for 2024, which is in line with many money market funds for the year. It is important to note that the Fed Funds overnight rate ended 2024 at 4.33%, with most Treasury bills slightly below that level. If the Fed does indeed pause rate cuts, it is reasonable to expect money market returns to be near 4%, at least for the early part of 2025. Note also from Table 1 that while Treasury bills led the way in 2024, the three longer-term bond benchmarks shown have all outperformed Treasury bills by nearly 2% per year so far this century.
A more in-depth look at bond returns reveals that shorter maturities generally fared better than longer ones in 2024. Also of note is that credit spreads tightened from 93 basis points to 77 basis points in 2024 which made it possible for corporate bonds to outperform comparable-maturity Treasury bonds in most cases. The two-year Treasury yield finished 2024 roughly unchanged at the 4.25% yield level. The 10-year Treasury, on the other hand, finished the year nearly 70 basis points higher from where it began, moving from 3.88% to 4.57% by the end of 2024. This yield movement in longer bonds resulted in some negative price action for the year. For example, O’Reilly Automotive Inc bonds maturing in 2026 saw a full-year return around 5%, while a 2032 maturity bond from O’Reilly Automotive returned around 2% for 2024 due to its negative price action.
A lot has been written about how “starting yield levels” are the best predictor of future returns with respect to fixed income. It is encouraging that the typical 1–10-year laddered Baird Trust bond portfolio begins 2025 with an average yield near 5%. Absent a massive elevation in yield levels, we are once again positioned for solid bond returns in the coming year.
Baird Trust Company (“Baird Trust”), a Kentucky state- chartered trust company, is owned by Baird Financial Corporation (“BFC”). It is affiliated with Robert W. Baird & Co. Incorporated (“Baird”), (an SEC-registered broker dealer and investment advisor), and other operating businesses owned by BFC. Past performance is not a predictor of future success. All investing involves the risk of loss and any security may decline in value. This is not intended as a recommendation to buy any security and views expressed may change without notice. Baird Trust does not provide tax or legal advice. This market commentary is not meant to be advice for all investors. Please consult with your Baird Financial Advisor about your own specific financial situation.
