FTSE Russell Fixed Income Perspectives: A Comprehensive Guide On US Fixed Income Market Trends And Analysis

2025-02-18 08:30:00 ET

Summary

• Investors are revisiting fixed income allocations, viewing the space through tactical building blocks and strategic sector rotation due to economic and asset class fundamentals.
• ETFs have made granular, indexed areas of the fixed income market investable, driving innovation and growth expected to continue through 2025.
• Fixed income funds posted a positive 3.68% return amid market volatility, with shorter duration and higher-yielding assets outperforming, notably the FTSE High Yield Index.
• Despite geopolitical and macroeconomic uncertainty, fixed income is regaining prominence as a viable equity market alternative, necessitating a deep understanding of sector-specific nuances and trends.

Key takeaways:

• The economic backdrop and asset class fundamentals have forced investors to revisit their fixed income allocations
• The fixed income landscape is evolving past the idea of traditional “core” portfolios, viewing the space more through the lens of tactical building blocks or strategic sector rotation
• The exchange-traded fund (ETF) has taken more granular, indexed areas of the market and made them investable. Where the ETF goes, innovation seemingly following. There is plenty of room for continued product innovation in specific sectors and subsectors. We anticipate continued innovation and growth in the fixed income fund market throughout 2025
• Fixed income posted modest gains amid market volatility. U.S. fixed income funds returned a positive 3.68% on average, marking the second consecutive plus-side performance following 2022’s record loss (-9.83%)—Q4’s bear steepener erased a strong start to the year
• Managing duration has been paramount in fixed income, with shorter duration and higher yielding assets ending the year as top performers—FTSE High Yield Index (+8.49%) was not only the top performing broad-based index, but also the only to report Q4 gains (+0.23%)
• While there is still geopolitical and macroeconomic uncertainty in the near-term, fixed income has revived its standing as a viable alternative to equity markets. As fixed income re-enters the limelight, its critical to understand the nuances and trends within each sector

Other Notes

• The paper primarily leverages FTSE Russell Fixed Income indices and data, while also being supported by LSEG Lipper and various LSEG Workspace applications
• This analysis will be paired with year-long sector specific analysis, diving into the unique risk return characteristics defining the fixed income market
• FTSE Russell Fixed Income Perspectives is backed by Fixed Income Index Module (FIXM) which allows for both analysis of traditional fixed income sectors but has the ability to take a product thesis from ideation to creation

Executive summary

The final stretch of 2024 proved difficult for US fixed income markets as poor fourth quarter performance cemented a modest annual return for the overall asset class. On average, US fixed income funds (including both conventional mutual funds and exchange-traded funds) returned a positive 3.68% during the year, marking the second-straight calendar year in the black after their worst year on record in 2022 (-9.83%). The promising start through September (+5.04%) was derailed by Q4 (-1.33%) — the first quarterly loss in five at the asset class level.

High-level averages tend to make for good headlines and poor analysis. Going one step deeper, sector performance looked like what we have seen over the last two years. 2024 saw sectors which are typically less sensitive to interest rate movements outperforming the pack — shorter duration and lower credit quality. Emerging markets were an additional bright spot after a strong 2023, with US policy easing efforts realised there first.

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