These days, the normally staid bond market has become quite volatile. Uncertainty abounds. Interest rate policy is unknown, inflation remains an issue, and the fiscal health of the U.S. is now in question. For many fixed-income investors, this environment has become difficult to navigate, and many have paused and begun to question their strategies.
However, according to one investment bank, investors should embrace this bond market with everything they’ve got.
That’s the gist, according to a new whitepaper from J.P. Morgan’s Asset Management unit. A variety of factors should help interest rates settle near today’s higher levels. That will provide more yield, enhanced income, and bond diversification benefits. And in that, fixed-income investors should be buying.
Will Easing Have A Real Effect?
Arguably, the biggest trend for fixed-income investors this year has been a continuation of the interest rate policy and yield rollercoaster. Back in 2024, the Fed began its easing trend, which should have driven bond yields lower as investors rushed into bonds to lock in those higher yields. And yet, the yield on the 10-year Treasury moved within a range of 3.60% to 4.70% before ending the year about 70 basis points higher. So far in 2025, it has been a similar situation, with the 10-year yield bouncing higher and then dropping lower.
The recent debt downgrade from Moody’s highlights the continued issue.
Woes are starting to increase as investors continue to worry about the fiscal health of the United States. Budgetary spending plans and new tax policies have the potential to increase deficits. The nonpartisan Committee for a Responsible Federal Budget estimates that current plans will create a $7.8 trillion deficit over the next decade.
At the same time, the tariff pauses — particularly, the pause with China — have once again reignited growth and have continued to put inflation back on the radar. This has created a very weird environment for the Fed to operate in. While more rate cuts are expected this year, the central bank remains cautious. And even if they do cut, the so-called bond vigilantes are now demanding more yield from U.S. Treasury debt to overcome the growing risks.
According to J.P. Morgan, all of these trends will create an environment where easing policy “ends.” Despite the Federal Reserve cutting rates, higher fiscal risks will keep yields right where they are. Moreover, inflationary risks will prevent the central bank from cutting enough to overcome the effects of the bond vigilantes.
A Great Spot for Fixed Income
While many fixed-income investors have been cautious on the bond market’s dynamics and the current situation, J.P. Morgan suggests embracing the chaos and current high-yield environment as it provides several tailwinds for portfolios.
One is real income potential.
Looking at various bond sectors across the credit spectrum, many are still providing yields over their 10-year averages. The vast majority are doing so by several full basis points of extra yield. This chart from the investment bank underscores the income opportunity for investors across core and core-plus bond sectors.
_Source: J.P. Morgan Asset Management _
As you can see, bonds are still offering top yields relative to historic norms.
What’s even better is that a bond’s starting yield is often a great predictor of its long-term returns. Looking at the Bloomberg U.S. Aggregate Index, J.P. Morgan found that since the index’s launch in 1976, the index has shown that its starting yield and its five-year forward returns are nearly identical. The starting yield of the index explains almost 90% of its future returns with an R-squared of 0.88. This fact doesn’t just apply to the Agg. Many bond sectors across the credit and duration spectrum show this trend. With yields high, investors have an opportunity to score not only income but an attractive total return for the long haul. 1
All of these high yields have another benefit as well — diversification. The high income is valuable in reducing the volatility in the bond market. It’s also valuable in reducing stock market volatility. While correlations between stocks and bonds have been moving in lock-step in recent years, the extra yield from bonds still provides a cushion when looking at classic 60/40 portfolios. JPM notes that last year, a higher starting yield of nearly 5% for the U.S. Aggregate Index provided plenty of benefit to a balanced portfolio when looking at performance.
Embracing Bonds Today
While the bond market may seem scary and fraught with volatility, the truth is, the asset class seems ripe for the picking. High starting yields are providing plenty of upside and income for portfolios as the various factors will keep yields high for the time being. Fiscal and inflationary woes will tie the Fed’s hands. This provides plenty of opportunity for investors within the bond space to win and succeed.
According to J.P. Morgan, investors should consider those opportunities outside the Agg and Treasury bonds.
While there is nothing wrong with Treasuries, the investment bank highlights that the opportunities in credit may be better, thanks in part to higher yields. For investors, holding core exposure to the Agg and then exploring these other sectors could be the most fruitful way to play the current bond market environment and get extra income into a portfolio without taking on that much more risk. For example, JPM highlights the state-backed and nearly 9% yield in high-yield muni bonds as an example.
Both active and passive ETFs can be used to achieve a strong mix of traditional and non-traditional bond sectors to fully embrace bond opportunities.
Core Bond ETFs
These ETFs were selected based on their low-cost exposure to core bonds, Treasuries, investment-grade corporate bonds, and mortgage-backed securities. They are sorted by their YTD total return, which ranges from 1.9% to 2.5%. They have expense ratios between 0.03% and 0.36% and assets under management between $150M and $314B. They are currently yielding between 3.6% and 5%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| HCRB | Hartford Core Bond ETF | $292M | 2.5% | 4.6% | 0.29% | ETF | Yes |
| AVIG | Avantis Core Fixed Income ETF | $1B | 2.2% | 5% | 0.15% | ETF | Yes |
| VCRB | Vanguard Core Bond ETF | $110M | 2.2% | 4.4% | 0.10% | ETF | No |
| BND | Vanguard Total Bond Market Index Fund | $314B | 2.1% | 3.9% | 0.03% | ETF | No |
| AGG | iShares Core U.S. Aggregate Bond ETF | $126B | 2.1% | 3.9% | 0.03% | ETF | No |
| IUSB | iShares Core Total USD Bond Market ETF | $33B | 2.1% | 4.2% | 0.07% | ETF | No |
| SPAB | SPDR® Portfolio Aggregate Bond ETF | $8.4B | 2.1% | 4% | 0.03% | ETF | No |
| GBF | iShares Government/Credit Bond ETF | $157M | 2% | 3.7% | 0.20% | ETF | No |
| FIGB | Fidelity Investment Grade Bond ETF | $192M | 1.9% | 4.4% | 0.36% | ETF | Yes |
Dynamic Income ETFs
These ETFs were selected based on their low-cost exposure to active bond management within the unconstrained, dynamic, and go-anywhere sectors. They are sorted by their YTD total return, which ranges from 1.5% to 2.5%. They have expenses between 0.18% and 0.71% and assets between $243M and $31B. They currently yield between 4.3% and 7.5%.
| Ticker | Name | AUM | YTD Total Ret (%) | Yield (%) | Exp Ratio | Security Type | Actively Managed? |
|---|---|---|---|---|---|---|---|
| BOND | PIMCO Active Bond ETF | $5.5B | 2.5% | 5.3% | 0.71% | ETF | Yes |
| TOTL | SPDR DoubleLine Total Return Tactical ETF | $3.5B | 2.3% | 5.1% | 0.55% | ETF | Yes |
| JPST | JPMorgan Ultra Short Income ETF | $30.7B | 2.2% | 4.5% | 0.18% | ETF | Yes |
| FBND | Fidelity Total Bond ETF | $18.1B | 2.2% | 5% | 0.36% | ETF | Yes |
| MINT | PIMCO Enhanced Short Maturity Active ETF | $12.8B | 2.1% | 4.8% | 0.35% | ETF | Yes |
| BINC | BlackRock Flexible Income ETF | $8.14B | 2.1% | 5.5% | 0.52% | ETF | Yes |
| FIXD | First Trust TCW Opportunistic Fixed Income ETF | $4.32B | 2.1% | 4.3% | 0.65% | ETF | Yes |
| DBND | DoubleLine Opportunistic Bond ETF | $413M | 2% | 4.8% | 0.45% | ETF | Yes |
| DFCF | Dimensional Core Fixed Income ETF | $243M | 2% | 4.6% | 0.19% | ETF | Yes |
| SRLN | SPDR Blackstone Senior Loan ETF | $9.49B | 1.5% | 7.5% | 0.70% | ETF | Yes |
Overall, the bond market seems to be full of uncertainty at the given moment, with fiscal and inflationary risks still growing. However, the environment may actually be a great place for investors to tread. Thanks to high starting yields and factors that will help keep yields/rates high, investors still have an opportunity to embrace bonds and score some very good yields. That income will help create diversification and strong forward returns.
Bottom Line
Investors shouldn’t be shying away from bonds. They should be buying them. High starting yields have long been a great predictor of future returns. And with yields still high and many factors keeping those yields elevated, the chance to win big in bonds is now.
1 J. P. Morgan Asset Management (March 2025). Embrace today’s bond market: Investing in a higher interest rate environment
