Yes, 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 in the shadow of the stock market, it has also been a good year for the bond market.
What makes the gains in the bond market noteworthy is that they’ve 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% target. But with President Donald Trump’s tariffs seen as the cause for rising inflation, bond investors focused on expected Fed 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—over the course of the year.
It was a particularly good year for the high-yield bond market, where against the backdrop of the stock market rally, the Morningstar US High Yield Bond Index has returned over 8% in 2025. At the same time, with yields falling, interest rate-sensitive long-term Treasuries also fared well, on track for a north of 5% return.
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
For the many investors that hold portfolios blending stocks and bonds, it was an especially good year, as both stocks and bonds posted solid gains for 2025. The strategy of holding investments across both key asset classes is aimed at providing portfolio diversification. On a high level, the idea is that when stocks fall, bonds would rally, smoothing out portfolio returns. As a proxy for the these strategies, the 60/40 stock-bond split is a key benchmark.
Back in 2022, when the last bear market for stocks coincided with the worst bond market in modern history, the question was 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—list 15.3%. Notably, those questions don’t come up in a year like 2025, when both bonds and stock rise.
For 2025, the Morningstar US Moderate Target Allocation Index is on track to finish the year with a roughly 15% return. That’s down from the 16.8% return posted in 2024, but roughly double the average return seen from 2005 through 2024.
What’s Next for the US Dollar?
US investors generally pay little attention to goings-on in 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. That currency impact 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 that the dollar weakening story isn’t over yet. The macro forces that drove the dollar’s decline in 2025, including rising US debt burdens and an economic outlook clouded by tariffs, remain in play. You can find more of Cheng’s outlook for the dollar here.
Another Quiet Holiday Week Likely Ahead
The holiday calendar this year makes for two weeks split into four parts, and in the process, making it 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.)
On the news side of the equation, this means the next high-profile event on the investing calendar won’t be for another 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 could be key to determining whether the Fed cuts rates at its Jan. 27-28 meeting.
In the meantime, in the days ahead we’ll continue to wrap up 2025 and dig into the outlook for 2026.
