Monthly fixed-income focus
Our outlook for what’s ahead for fixed income
What you need to know
- Bond yields have risen, but the benchmark 10-year Treasury yield is likely to remain in the 4%–4.5% range.
- The Fed is set to slow the pace of interest rate cuts, likely targeting the 3.5%–4% range.
- Bonds are poised to take the lead over cash, recently regaining a yield advantage.
Portfolio tip
Following strong equity market performance, your allocation to stocks may be higher than you intend. Consider rebalancing toward fixed income, if appropriate. We see higher bond yields setting the stage for stronger returns ahead.
Bond yields have risen, though the benchmark 10-year Treasury yield is likely to remain primarily in the 4.0%-4.5% range
The slowing pace of disinflation and policy uncertainty from the new administration have prompted markets to dial back expectations for Fed interest rate cuts, pushing short-term yields higher. Resilient economic growth and government budget deficit concerns have increased the difference between long- and short-term bond yields, steepening the yield curve. As a result, the 10-year Treasury yield is up about 100 basis points (1.0%) from its September 2024 low.
With the fed funds rate likely heading toward 3.5% to 4%, a positive yield curve should keep intermediate-term Treasury yields above this range. The Fed’s balance sheet reduction program, known as quantitative tightening, is expected to end soon. This would allow the Fed to participate more actively in Treasury auctions to replace maturing bonds. This additional demand should support bond prices, in turn helping to keep yields relatively contained to the upside.
While 10-year yields have moved modestly above the 4% to 4.5% range, we expect this to be temporary. Additional Fed rate cuts and bond purchases should help keep yields from rising meaningfully. On the other hand, resilient growth, widening deficits and uncertainty around inflation could prevent yields from falling much further, in our view.
Ten-year yields are near the high end of their range over the past two decades. Since Treasury bonds serve as the benchmark for most U.S. investment-grade bonds, higher yields should provide the foundation for solid returns ahead, with most of the contribution coming from income rather than price appreciation.

This chart shows the path of the 10-year Treasury yield since 2005.

This chart shows the path of the 10-year Treasury yield since 2005.
The Fed to slow the pace of interest rate cuts, targeting the 3.5%–4% range
We see the Fed continuing its rate-cutting cycle in 2025 to gradually remove its restriction on the economy. With the fed funds rate now around 4.5% and core personal consumption expenditure (PCE) inflation around 2.8%, we believe there is room to bring rates down to a less restrictive policy stance, perhaps settling in the 3.5%–4% range.
The Fed’s recalibration is backed by improvement in inflation rather than an economic downturn. This should continue to support the expansion, likely keeping the economy on track for a soft landing. In general, a neutral fed funds rate tends to be about 1% above inflation rates, which we see settling in the 2%–3% range. This implies perhaps a relatively shallow set of rate cuts ahead.
The Fed began cutting interest rates in 2024 as the labor market normalized and inflation gradually moderated. However, the Fed’s preferred core PCE inflation gauge remains above the 2% target, and the pace of disinflation has slowed.
Pro-growth policies could drive some resurgence in economic growth, potentially spurring more hiring, while immigration reform could reduce the number of available workers. Any tightening in labor markets or rise in inflation would reduce the need for rate cuts, while a deterioration in the growth outlook could cause the Fed to cut rates more than currently expected.

This chart shows the path of the federal funds rate since 2022, along with Fed projections and the market-implied path for the rate for 2025.

This chart shows the path of the federal funds rate since 2022, along with Fed projections and the market-implied path for the rate for 2025.
Bonds poised to take the lead over cash
In 2024, cash outperformed U.S. investment-grade bonds for the third time in the past four years, benefiting from a yield advantage for much of the year. We see this trend reversing in 2025 as Fed rate cuts have driven cash yields below bond yields. Since yield is a key driver of fixed-income returns, it sets the stage for bonds to outperform cash in the year ahead, as they have in 31 years since 1981.
Further Fed rate cuts could cause cash yields to fall more than intermediate- and long-term bond yields, likely steepening the yield curve and widening the yield advantage of bonds over cash.
Over the past few years, investors have gravitated toward cash and cash-like instruments that offer favorable yields, such as money market funds and CDs. While cash can provide important benefits, holding too much in cash or cash-like investments can present risks, such as the potential for lower returns over the long term. For perspective, since 1981, cash has generated annualized returns of 4.1%, compared with 6.7% for U.S. investment-grade bonds

This chart shows the path of cash and U.S. investment-grade bonds yields since 2020, with bonds regaining the advantage in late 2024.

This chart shows the path of cash and U.S. investment-grade bonds yields since 2020, with bonds regaining the advantage in late 2024.
Brian Therien
Brian Therien is a Senior Fixed Income Analyst on the Investment Strategy team. He analyzes fixed-income markets and products, and develops advice and guidance to help clients achieve their long-term financial goals.
Brian earned a bachelor’s degree in finance from the University of Illinois at Urbana–Champaign, graduating with honors. He received his MBA from the University of Chicago Booth School of Business.
Important information:
This content is for educational and informational purposes only and should not be interpreted as specific investment advice. Investors should make investment decisions based on their unique investment objectives and financial situation.
Past performance of the markets is not a guarantee of future results.
Before investing in bonds, you should understand the risks involved, including credit risk and market risk. Bond investments are also subject to interest rate risk such that when interest rates rise, the prices of bonds can decrease, and the investor can lose principal value if the investment is sold prior to maturity.