2025: Strong Bond Returns With More To Build On
We believe current yield levels of government and corporate bonds remain attractive for long-term bond investors as we begin 2026.
In 2025, bonds posted positive total returns as prices of highquality government and corporate bonds rose, parti cularly in the first half of the year when 10-year interest rates fell the most. The Bloomberg Intermediate U.S. Government/Credit benchmark finished the year with a 6.97% total return. Municipal bonds also posted positive returns near 5% despite the headwind of record supply throughout the year.
As evidenced in the bond return table, 2025 was a strong year for taxable bonds – ranking fifth best so far this century and marking the third year in a row of positive returns. One year ago, we wrote: “The typical one-to-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.
We did, in fact, have solid bond returns for 2025. Because yields fell somewhat during the year – causing prices to rise – Baird Trust bond ladders benefitted and were able to return a bit more than the starting yield level.
Robust Bond Issuance
Bloomberg reported that 2025 U.S. investment-grade issuance totaled $1.6 trillion, second only to 2020’s record $1.75 trillion amid Covid-driven borrowing and ultra-low rates. Wall Street firms are expecting issuance in 2026 to surge above $2 trillion and to set a new record amid favorable conditions. The average yield premium of corporate bonds compared to Treasury bonds, typically called the “spread,” is hovering near multi -decade lows.
Likewise, municipal bond issuance reached an all-ti me record near $600 billion in 2025, driven by rising infrastructure needs, elevated project costs, expiring stimulus incentives and proactive borrowing by states and local governments. Municipal bond issuance is expected to remain elevated into 2026 as some market observers are expecting supply to reach $750 billion.
Yield Levels Remain Attractive
The Federal Reserve lowered its overnight interest rate another 75 basis points in 2025 – and as a result, money market rates dropped to around 3.5% by year end. Money market rates had previously been above 5% for much of 2023 and 2024. The two-year Treasury yield finished 2025 lower as well, moving from 4.25% to roughly 3.5%. Meanwhile, the 10-year Treasury yield finished the year about 40 basis points lower at 4.17%. Contrary to the overnight interest rate, which is directly controlled by the Fed, these longer-term interest rates are influenced by growth and inflation expectations, supply and demand dynamics and fiscal policy. Despite the mild yield drop in 2025, we believe current yield levels of government and corporate bonds remain attractive for long-term bond investors as we begin 2026.
New Year, Same Priorities
As the new year begins, your Fixed Income team at Baird Trust remains laser-focused on safety, liquidity and diversification away from equity risk. What does that mean exactly? From a safety standpoint, it means we continually monitor our bond issuers, helping ensure that we remain highly confident of ontime coupon and principal delivery to our clients – regardless of market conditions. In terms of liquidity, the bonds we typically buy are large, recent issues that trade frequently. That, in turn, allows bonds to be sold and converted to cash quickly if needed. Ample near-term maturities and a laddered approach mean bond cash inflows are never far away.
Finally, our focus on diversification away from equity risk translates to a bond portfolio that behaves differently than stocks – one that is less volatile. Each of us, either directly or indirectly or both, are exposed to the ups and downs of the stock market and their underlying economic effects. Our focus is to make bonds a counterweight to those ups and downs. As we head into another year, rest assured we are maintaining a disciplined mix of high-quality government and corporate bonds to achieve the goals of safety, liquidity and diversification.
Bring it on, 2026!
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.
©Robert W. Baird & Co. Incorporated.
