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2025 did not turn out as we thought it would. Imagine for a moment that one had the “fortune” of meeting a time-traveller way back in Dec 2024, bringing the biggest news events of 2025 as a gift of foreknowledge in investment decision-making. “Firstly”, he says, “China would create a large language model – called DeepSeek – which rivals ChatGPT and US supremacy in the AI race. Then, President Trump will unleash sweeping trade tariffs across many countries – including a baseline 10% for all imports – on a day he calls Liberation Day. At some point, he even threatens 145% tariffs on China. Finally, the US will attack and destroy three nuclear enrichment facilities in Iran through a military operation in response to an escalating Israel-Iran conflict.” The rational investor would have taken much risk off the table, which, with the benefit of hindsight, would have been a terrible decision to make given that the markets had defied all logic with one of the broadest risk rallies in 2025.
Conservatism was not rewarded. It is difficult to think of any investor being too disappointed with a year in which they could make money buying anything from commercial paper to cryptocurrency. Yet one could imagine bond investors – the ever-faithful harbingers of doom and gloom – feeling like they missed out on substantial returns, even though all the facts seemed in favour of risk-aversion. Make no mistake – the 7.3% returns in Treasuries or the 9.5% returns in global IG credit for just the first nine months of 2025 were no small feat. If one were to judge this performance purely through a fixed income lens, it is quite remarkable. However, knowing that markets often base their expectations on relative performance, bond investors who cannot resist a covetous glance towards the equity or precious metals markets would inevitably feel that sense of greeneyed envy.
Looking for unseen benefits. This is why the judgement of the merits of an investment allocation into bonds just by its absolute returns in the period risks overlooking what its purpose in the overall portfolio is. Suffice to say, few go into bonds expecting highoctane returns; by virtue of its lower-risk characteristics one should normally expect it to underperform higher risk assets like equities or commodities. But therein lies the crux of why bonds are often underappreciated – because it is simply more difficult to visualise risk-adjusted returns than total returns. Take 2025 for example. Global equities returned c.20% against the c.10% in global IG credit for the first nine months of the year. To a casual observer, equities appear better. However, the weekly volatility of global equities in the same period was c.2.1%, more than three times that of global IG credit of c.0.6%. Yes, equity investors got twice the returns, but it took more than three times the “risk” to get there. Are bonds therefore better? Those who make comparisons are still missing the point; the main takeaway – and one that balanced investors should celebrate – is that equities did an excellent job as an offensive asset, and that bonds did an excellent job as a defensive asset in 2025.
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