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At least in one corner of the market, amateurs appear to be outsmarting the pros once again.
The majority of major asset managers and banks were clear that bonds would return this year. If that rings a bell, yes, we’ve heard this before. No, it didn’t really work out because inflation, the mortal enemy of bonds, persisted. However, the message for 2025 was clear. Central banks are cutting interest rates and we won’t see yields like this again. Use up your cash and buy bonds to lock in interest rates.
The year has just begun, and it is clearly unwise to read too much into the rise and fall of the market at the beginning of the year. But it’s bad enough that the huge rise in bond prices that many major asset managers and investment banks were predicting for 2024 didn’t materialize, and as one professional bond investor puts it: So far, 2025 has been an “annoying” year.
Bond prices are depressed again because market participants are not only backing away from expectations for further interest rate cuts from the U.S. Federal Reserve to support bonds, but also in the opposite direction. Bank of America analysts said in a note that “a rate cut was due in 2024” following the recent “gangbuster” US jobs report. The bank now believes the Fed will hold out for an extended period of time, but the conversation is “advanced.” . . For hiking.”
This is awkward for the staff, who have “restored their bonds.” In a mid-December memo, Pimco’s Richard Clarida, a former senior Federal Reserve official, made the case, along with Mohit Mittal, about running out of cash by dabbling in bonds.
“Market conditions have changed,” they wrote at the time. “Now that the Fed has embarked on a rate-cutting path, over-allocating cash creates reinvestment risk as assets are rapidly and repeatedly switched to lower-yielding versions…compared to cash, which yields less as interest rates decline. Bonds offer more attractive opportunities.”
I’m not going to argue with Pimco about bonds, and it’s very likely that they’re right over the long term. This is a broad consensus among major banks and investors, with nearly all banks tracked by Natixis Investment Managers recommending avoiding cash this year. But the volatility in early 2025 didn’t help, and some (relatively) amateur investors weren’t convinced anyway.
“The big bond companies are saying now is the time to buy bonds,” said Norman Villamin, group chief strategist at Union Bancaire Prive in Switzerland. “But our customers are smart. They’re saying, ‘Why would I do that?'”
Villamin says his clients – generally wealthy individuals and their families – are still happy to hold the majority of their portfolios in cash, with a decline of just under 5% a year in the US and 3% of deposits in the euro area. It is said that they are paying %. . This is still a big win for investors who remember rainy day funds earning near zero interest rates.
“The risk that people need to wake up to is their own bonds,” Villamin said. “Bonds are not pricing in the new inflation environment.”
This obviously all depends on the investor’s time horizon. If you’re looking to park your money away for 10 years, the bond yields currently on offer are once again very generous by the standards of the past few decades. If you need to tap into your savings faster, cash is your friend, as the risk of bond prices falling is greater. (Another Swiss private banker explained to me a few months ago that his wealthy clients never know when they might buy a new house or another yacht. I nodded. The struggle is real. )
In any case, bonds should not be a sexy part of an investor’s portfolio. Bonds exist to provide stable income and balance against extreme stocks, which had a very strong 2024, especially in the US.
Nevertheless, this market is still not used to the new groove. Inflation eats away at interest payments and overall returns over the life of a bond, but it has not yet been completely overcome.
Cash experts note with some glee that money is still flowing in, despite the rush of exits that many expected as the Fed began cutting interest rates.
Deborah Cunningham, chief investment officer of global liquid markets at Federated Hermès, said: “As yields fall, we accept the theory that investors are chomping at the bit to put all their cash into stocks and bonds. I can’t do it,” he said. He said many people would be happy if the Fed’s final interest rate (its long-term target) stays around 3.5%, especially those who primarily use cash to pay for expenses and other needs. “I think the (cash) industry needs to make room to fly a new flag (this year),” she says.
As always, we’re seeing competing worldviews here, of course, from people with skin in the game. Nevertheless, while bonds have meandered, cash has turned out to be much more stable in recent years than most asset managers expected. This is a tough habit to break, and if you’re still hoping this money will jump into riskier asset classes, you may want to wait a while.
katie.martin@ft.com
