Fixed Income Funds And Their Fortunes

Active bond managers largely underperformed in the first half of 2025, with 69% of global bond funds lagging their benchmarks, significantly higher than equity funds. Notably, 90% of U.S. General Investment Grade Funds and 88% of U.S. High Yield Funds failed to beat their benchmarks, while European managers also struggled amidst steepening sovereign yield curves and historically tight corporate credit spreads. An exception was U.S.-domiciled Emerging Market Debt Funds, where nearly two-thirds outperformed, benefiting from a weaker U.S. dollar. This widespread underperformance highlights persistent challenges in generating alpha, with only 5 of 13 categories showing majority outperformance in H1 and no categories beating benchmarks over a 15-year horizon.

Analysis

Active bond managers faced significant challenges in the first half of 2025, with 69% of global bond funds underperforming their benchmarks on a fund-weighted basis, notably higher than the 54% observed for equities. This underperformance was particularly acute in the U.S., where 90% of General Investment Grade Funds and 88% of High Yield Funds lagged, while European managers also experienced substantial rates of underperformance.

Market conditions characterized by steepening sovereign yield curves, with the 10- and 2-year Treasury spread rising to 53 bps, and historically tight corporate credit spreads (narrowing by 23 bps in the U.S.) created a difficult environment. While increased duration risk in the U.S. and moderate tilts to riskier credit offered some benefit, European markets proved harder to navigate, with mixed results from similar strategies.

A notable exception was U.S.-domiciled Emerging Market Debt Funds, where nearly two-thirds outperformed, primarily benefiting from a weaker U.S. dollar that eased repayment conditions for dollar-denominated debt issuers. This highlights specific pockets of opportunity amidst broader underperformance, as only 5 of 13 headline categories achieved majority outperformance in H1, and none over a 15-year horizon.

The persistent underperformance underscores the difficulty of generating alpha in fixed income, exacerbated by ongoing monetary policy uncertainty, including the U.S. Fed's upcoming December rate decision, and concerns over labor market weakness and economic growth.

Key Decisions for Investors

• Given the widespread underperformance of active bond funds, investors should critically evaluate the value proposition of active management in fixed income, considering passive alternatives for broad market exposure.
• It may be prudent to selectively target specific segments like U.S.-domiciled Emerging Market Debt, which demonstrated resilience due to favorable currency dynamics.
• Investors should closely monitor upcoming monetary policy decisions, particularly from the U.S. Fed, alongside labor market and economic growth indicators, as these will significantly influence fixed income market direction.