A year worth bonding with

The last quarter of 2025 saw the Fed resuming its rate cutting cycle with a total of three cuts, following a pause across the first three quarters. With the Fed signaling continued cuts into 2026, we look at what this meant for bond markets last year, and how bond ETFs continue to shine in this environment.

Another strong year for fixed income

Fixed income closed out another strong year, with virtually every major fixed income sector ending the year in the green. Notably, despite cash returns falling as policy easing continues, different parts of the bond market have managed to offer investors what they look for in fixed income - income in a period where cash rates have begun to fall, and ballast along specific points on the curve where investors can position duration risk. Below, we look at fixed income performance in 2025 and note three observations:

1. The year for going global: a USD downtrend in light of tariff uncertainty and following Liberation Day saw the DxY index losing more than 9% last year as local currency exposures gained against the USD, a move that reflected the benefits of adding international exposures for portfolio diversification.
2. Emerging Market Debt (EMD) stands out: EMD was the top-performing sector in fixed income with Local Currency EMD gaining 19.3% in returns (USD-unhedged) and Hard Currency EMD at 14.3%. Backed by strong fundamentals and currency tailwinds, EMD offers a source of attractive income and yield.
3. The belly outperforms: 7-10Y US Treasuries logged the best performance across the curve, returning 8.2%. As the tariff-driven inflation spike failed to materialize and Fed cuts amidst labor market concerns supported bond returns, this underscored the benefits of precise duration allocation in this easing cycle.

Records after records for Bond ETFs

Industry bond ETF flows of US$669B in 2025 means that bond ETFs globally have seen inflows breaking new records for three consecutive years (Figure 1), reflecting a pickup in the structural adoption of bond ETFs, even as mutual fund flows fluctuate. At the same time, 2026 begins with a decidedly different yield environment from last year (Figure 2), with the US Treasury curve having steepened significantly.

As the rate environment remains volatile entering into 2026, bond ETFs continue to offer investors the flexibility and precision to nimbly adjust portfolios and navigate a complex backdrop. Today, ETFs offer access to almost every pocket of the bond market, offering solutions to the key questions of where to position in duration and how to find differentiated sources of income.