These bonds trounced cash in 2025, and they could still offer solid returns for investors
Investors who hoarded cash last year and sat out of bonds missed out on sweet returns – but there is still time to capture some opportunities in 2026. In 2025, global stocks, bonds and commodities all posted their best combined annual performance since 2019, an analysis from State Street found. In particular, core bonds – investment grade issues – notched a return of more than 8% last year, compared to cash’s 4.2% return, the firm found. The last time core bonds posted a dramatic outperformance to cash was in 2020, when they generated a 7.5% return versus a 0.7% return for cash. “What we’re looking at now, last year – that’s a notable excess return, a real return environment,” said Matthew Bartolini, global head of research strategists at State Street. Even as the Federal Reserve cut its benchmark three times in 2025 and brought its key interest rate down to 3.5% to 3.75% , investors continued to pile into money market funds. There was roughly $7.7 trillion in money market fund assets as of Jan. 21, according to the Investment Company Institute. Rates on these cash investments are down sharply from their highs, with the Crane 100 Money Fund Index showing a seven-day current yield of 3.5%. That figure is likely to keep sliding, particularly if the Fed trims rates later this year. “The direction of travel for cash rates is likely lower,” said Bartolini. “You have an environment now that is setting up quite positively for core bonds to have positive excess returns once again in 2026.” “That starting yield is already above the cash rate, and if things hold steady and cash rates fall, you’re looking at a good advantage,” he added. The best of both worlds Core bonds offer investors a “middle of the road” approach toward fixed income. Packing into cash may offer decent yield now, but investors miss out on price appreciation if they stay there as rates continue to fall. On the other hand, adding bonds that are long-dated exposes investors to sharp fluctuations in prices. That’s because issues with longer maturities tend to have greater price sensitivity to changes in rates, which is known as duration. Bond prices and yields move in opposite directions, and a sudden spike in yields could show up as a sharp price decline for long-dated bonds. Worries around long-dated U.S. Treasurys have been making headlines as of late, with BlackRock noting recently that rising debt and inflation pressures could make these issues poorly suited for portfolio ballast. The firm said that it has been tactically underweight long-term Japanese government bonds since 2023 and long-dated U.S. Treasurys since December 2025. Core bonds strike a balance between the short and long ends of the yield curve, with a duration of six to eight years. “You’re far out enough [on the yield curve] that you pick up yield over money markets, but you’re short enough that if the Fed continues to cut, you benefit from those cuts,” said Brian Quigley, portfolio manager and head of MBS and agencies at Vanguard. “By moving out to the intermediate part of the yield curve, you still capture a lot of that [additional premium] but you don’t necessarily expose yourself as much as you would going to the long end if term premium were to continue to rise,” he added. Term premium is the additional return that investors demand for holding longer-term bonds. Quigley’s team is “pretty bullish” on investment grade credit, and they like mortgage-backed securities. “We think that sector should remain supported and continue to perform,” he said, adding that his team is overweight on both categories. Core bond funds Investors aiming to add some exposure to core bonds could use exchange traded funds for a diversified approach. Holdings within these funds include government and corporate bonds, as well as securitized debt. Offerings include the Schwab U.S. Aggregate Bond ETF (SCHZ) , which has an expense ratio of 0.03% and a 30-day SEC yield of 4.11%. There is also the Vanguard Core Bond ETF (VCRB), which has an expense ratio of 0.10% and a 30-day SEC yield of 4.39%. The Baird Aggregate Bond Fund (BAGIX) expense ratio comes in at 0.30% and a 30-day SEC yield of 4.11%. “I think this is the right time to have this conversation if you haven’t moved out of cash,” said Quigley. “There are investors who may not realize that the yield on money market funds has fallen as much as it has.”
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