It’s been a very good year for stocks, with key equity market benchmarks on track to finish 2025 at or near record highs. But it’s also been a good year for the bond market, which is noteworthy because these gains have come despite bad news on inflation.
The most recent reading we have on the Federal Reserve’s favored inflation barometer, the September Personal Consumption Expenditures Price Index, had price pressures running at a 2.8% annual rate, well above the Fed’s 2.0% target. But with President Donald Trump’s tariffs seen as the cause for rising inflation, bond investors focused on interest rate cuts, which the central bank delivered late in the year. Though it’s unclear what the Fed’s next move will be, evidence of a weakening job market was enough to send bond yields lower (and prices higher) in 2025.
It was a particularly good year for the high-yield bond market. Against the backdrop of the stock market rally, the Morningstar US High Yield Bond Index returned over 8%. With yields falling, interest-rate-sensitive long-term Treasuries also fared well, on track for a return north of 5%. Add it all up and 2025 looks to have been the best overall year for bonds since 2020, with the Morningstar US Core Bond Index up about 7%.
Good News for 60/40 Portfolios
2025 was especially good for the many investors whose portfolios blend stocks and bonds (to provide diversification), as both asset classes posted solid gains. On a high level, the idea is that when stocks fall, bonds rally, smoothing out returns. As a proxy for these strategies, the 60/40 stock-bond split is a key benchmark.
In 2022, when the last bear market for stocks coincided with the worst bond market in modern history, some questioned whether the 60/40 strategy was dead. That year, the Morningstar US Moderate Target Allocation Index—which holds a diversified mix of 60% equities and 40% bonds designed as a benchmark for a 60/40 allocation portfolio—lost 15.3%. Notably, those questions don’t come up in a year like 2025, when both bonds and stock rise.
The US Moderate Target Allocation Index is on track to finish 2025 with a roughly 15% return. That’s down from the 16.8% posted in 2024, but roughly double its average return from 2005 through 2024.
What’s Next for the US Dollar?
US investors generally pay little attention to the currency markets. With the high level of home market bias, whether the dollar is rising or falling often only comes into play when considering foreign vacations.
But 2025 saw a significant weakening of the US dollar, and that meant better returns on non-US investments. This played a big role in the strong returns on emerging market stock funds, for example. The average fund in the Morningstar Diversified Emerging Markets category is up just shy of 30% in 2025.
Hong Cheng, head of fixed income and currency research for Morningstar Investment Management, thinks the dollar isn’t done weakening. The macro forces that drove the currency’s decline in 2025, including rising US debt burdens and an economic outlook clouded by tariffs, remain in play.
Another Quiet Holiday Week Likely Ahead
This year’s holiday calendar makes for two weeks split into four parts, which is conducive to light trading and mostly quiet markets. New Year’s Eve is a full trading session for stocks but a half day for bonds. (Our market holiday calendar can be found here.)
This also means the next high-profile event on the investing calendar won’t be for almost two weeks, with the release of the December employment report on Friday, Jan. 9, 2026. This data is expected to be relatively free from distortions tied to the federal government shutdown, and it could be key to determining whether the Fed cuts rates at its January meeting. In the meantime, in the days ahead, we’ll wrap up 2025 and dig into the outlook for 2026.
