How bonds performed in 2025: fund winners and losers

The last year has been marked by intense rallies for asset classes of all stripes, with equities and precious metals standing out in particular.

But bonds, often viewed as a sleepier investment best held when stock markets panic, have had their share of triumphs in 2025 too, with interest rate cuts presenting a more favourable backdrop.

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Unloved areas return to form

As the table of top bond sectors for the year shows, debt issued by governments and companies in the emerging markets have posted some big gains. Emerging market bonds issued in a local currency (rather than the US dollar) have had a good run in particular.

Why? As with the strong performance of emerging market equities in 2025, a big factor here is the weakening of the US dollar.

Many emerging markets issue debt in dollars, meaning any weakening can make it easier for them to manage repayments, a factor we see very clearly recognised in bond fund performance.

Bonds issued in a local currency rather than dollars are especially sensitive to fluctuations, explaining why the average fund focused here has performed so well.

A weaker dollar can also more generally strengthen emerging market currencies and drive capital flows to such markets.

Source: FE Analytics. Past performance is not a guide to future performance.

Interestingly, bonds denominated in euros have also had a good showing in 2025, with corporate bonds faring especially well. This may also reflect currency fluctuations, and accompanies a strong run of returns for European shares.

The average fund focused on high-yield corporate bonds returned 9.6%, with the Investment Association (IA) Euro Corporate Bond sector (focused on safer, investment-grade corporate bonds), returning an impressive 8.1%.

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It’s finally worth noting that the average fund in the IA Sterling High Yield sector returned 7.1%. Funds focused on this riskier segment of the corporate bond market suffered in the 2022 sell-off but have been on a strong run ever since then.

In terms of portfolio construction, high-yield bonds are closely correlated to stocks. This is because high-yield bonds are linked to the business results and fundamentals of the company that issues the bond, as well as the general health of the economy.

The list of best-performing bond funds is totally dominated by emerging market debt vehicles of different ilks, and it should be stressed that these are very niche holdings for experienced investors who have already diversified elsewhere. But some of the top names of 2025 are listed below.

Source: FE Analytics. Past performance is not a guide to future performance.

Dollar strugglers and government bonds

Happily, not a single bond fund sector is in the red this year, but the effect of the currency shifts discussed earlier can be seen in the list of the worst performers. Three different sectors focus on dollar-denominated debt.

Meanwhile, bonds whose payments are linked to inflation expectations sit alongside them at the bottom of the table, perhaps suggesting that such expectations are easing again.

Source: FE Analytics. Past performance is not a guide to future performance.

A good number of individual funds have posted losses in 2025, but it’s a pretty disparate mix here.

There are some funds focused on long-dated euro-denominated bonds and some short-dated US Treasury funds among others. The iShares Core € Corp Bond ETF EUR Dist GBP (LSE:IEBC) stands out with a loss of around 17%, while Amundi Euro Government Bond 25+Yr ETF is down by almost 10%.

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Meanwhile, it’s worth checking on how the IA UK Gilts sector fared, even if many investors tend to hold such debt directly rather than via a fund. The sector returned almost 5%, a decent showing after some volatile earlier years.

Fans of “strategic” bond funds, which have the flexible remit to invest across the asset class, will note that those portfolios focused on riskier areas such as high yield have really led the way in terms of performance versus peers this year.

Top names from the IA Sterling Strategic Bond sector in 2025 include Man Dynamic Income I H GBP Cap with a roughly 10% return, Royal London Sterl Extra Yld Bd A and Artemis High Income I Inc.