The US fixed-income markets extended their positive trajectory into 2025’s final quarter. The Morningstar US Core Bond Index, a proxy for the US-dollar-denominated investment-grade bond market, returned 0.97% during the quarter, ending the year with a 7.12% gain, the highest since 2020.
While the pace of returns slowed relative to the strongest quarters earlier in the year, the fourth quarter reinforced a broader theme that defined 2025—elevated starting yields anchored performance across most fixed-income segments. Credit-sensitive sectors outpaced interest-rate-sensitive ones. That reflected tightening of the yield spreads between bonds and Treasuries with the same interest rate sensitivity (as measured by duration) alongside strong coupon income; the investment-grade corporates finished the year up 7.56% as represented by the Morningstar US Corporate Bond Index compared with the Morningstar US Treasury Bond Index, which was up 6.17%.
With the Federal Reserve’s two consecutive rate cuts during the quarter, Treasury yields edged lower across much of the yield curve, except longer-dated 20-plus-year yields, which increased marginally, suggesting caution about the long-term economic outlook. This steepening of the yield curve benefited short and intermediate duration exposure while limiting the upside for longer-duration debt. The typical long-government Morningstar Category fund, which invests in long-dated Treasury bonds and carries a duration of 15.96 years, fell 0.62% during the last three months, although it still gained 4.52% for the full year.
On the other hand, emerging-market debt stood out as the strongest performer for the quarter and year, owing to a softer US dollar, improving fundamentals, and differences between interest rates across the globe. The US emerging-market local-currency bond category led the way, with a 3.38% average gain during the quarter, and finished the year with stocklike returns of 19.58%.
Below, we dig into a few fixed-income categories and highlight how some of our favorite bond managers fared during another eventful quarter and year.
Emerging Markets Remained Unstoppable
Emerging-market debt outperformed all fixed-income sectors, given improving fundamentals and renewed investor interest in higher-yielding assets as the Federal Reserve continued its interest rate cuts later in 2025. The typical fund in the emerging-market bond category, a group of strategies that invest more than 65% of assets in foreign bonds from developing countries, gained 2.88% during the quarter, while its emerging-market local-currency bond counterpart, which takes more foreign-currency risk, gained 3.38%.
A weakening US dollar trend that took hold after tariff announcements in April proved a powerful tailwind for emerging-market local-currency debt, as currency appreciation on top of attractive carry translated into double-digit returns for the segment in 2025. Bronze-rated Pimco Emerging Markets Local Currency Bond’s PELBX 22.92% calendar-year gain landed in its category’s top decile.
Muni Markets Ended the Year on a Firm Footing
After a weak first half of 2025, municipal bonds roared back with strong third-quarter results, and they sustained a modest positive performance into the year-end as interest rates eased, credit fundamentals remained resilient, and demand exceeded supply. The Morningstar US Municipal Bond Index, a proxy for US-dollar-denominated investment-grade tax-exempt debt, flipped from a 0.69% loss at midyear to a 3.94% year-end gain.
Among national muni Morningstar Category peer groups, muni-national long funds gained 1.54% during the quarter, outpacing the muni-national intermediate and muni-national short group’s 1.47% and 0.67% returns, respectively. The Federal Reserve’s interest rate cuts through late 2025 underpinned most of this outperformance, as broader yield declines supported price appreciation for longer-duration municipal bonds. For the year, however, the muni-national intermediate group finished first with a 4.35% gain. Within that category, Silver-rated Capital Group Municipal Income ETF CGMU had another strong showing. Its top-quartile 5.23% calendar-year gain added to its short yet standout track record since its October 2022 inception, which ranked eighth out of roughly 126 distinct rivals.
Securitized Debt Outperformed
Securitized-debt outperformed broader US corporate debt during the quarter thanks to stable fundamentals, tightening yield spreads, and demand as interest rates trended lower, which increased investor appetite for income. The Morningstar US Mortgage-Backed Securities Index gained 1.59% during the quarter, versus the Morningstar US Corporate Bond Index’s 0.63% return.
A typical securitized-debt diversified bond fund invests at least 65% in investment-grade securitized sectors, including government and nonagency mortgage-backed securities; it gained 1.46% during the quarter and ended the full year at 7.98%. Bronze-rated TCW Securitized Bond’s TGLMX top-quartile 8.98% return for the full calendar year owed largely to its above-average duration within the category, which helped as rates declined.