Inflation Could Push Bond Yields Above 5% This Year, Strategist Warns

As the year progresses, investors are keeping a close eye on the bond market, with some strategists warning that inflation could push bond yields above 5% in 2025. Morningstar Investment Management's chief multi-asset strategist, Dominic Pappalardo, has expressed concerns about the potential for higher inflation to drive bond yields up, citing two main factors: potential tariffs proposed by the incoming Trump administration and decreased tax rates for both wage earners and business owners.



Pappalardo's prediction aligns with historical trends in bond yields. In 2024, the 10-year Treasury yield started at around 3.9%, rose to a high of 4.7% in April, and ended the year at roughly 4.6%. This range is consistent with the predicted range for 2025, suggesting that the bond market will continue to bounce back and forth within well-defined ranges. For investors, this implies that bonds will continue to offer positive real yields, meaning the income generated will be higher than the inflation rate. This provides an opportunity for investors to make money by investing in bonds, even after accounting for inflation.

However, investors should be aware of the risks associated with rising inflation and bond yields. One strategy to mitigate these risks is to diversify fixed-income portfolios by including emerging-markets debt, which offers higher yields than local inflation rates. For instance, Brazil's local bond yields are over 13%, while Mexico's are over 10%, against local inflation of about 4%. This provides an opportunity to increase value in fixed-income portfolios, although these emerging markets come with more risk than US Treasuries. Another strategy is to invest in inflation-protected securities, such as Treasury Inflation-Protected Securities (TIPS), which adjust their principal based on changes in the Consumer Price Index (CPI). This helps to preserve the purchasing power of the investment during periods of high inflation. Additionally, investors can consider short-term bonds or floating-rate notes, which are less sensitive to changes in interest rates and can provide a hedge against rising yields. Lastly, maintaining a well-diversified portfolio that includes equities and other asset classes can help to mitigate risks associated with rising inflation and bond yields, as these assets may perform well during periods of high inflation and rising interest rates.



In conclusion, investors should be aware of the potential for inflation to push bond yields above 5% in 2025, as warned by Morningstar's Dominic Pappalardo. By understanding the factors contributing to this prediction and employing appropriate risk mitigation strategies, investors can navigate the bond market with confidence and make informed decisions about their portfolios.