How bonds performed in 2024: best and worst funds

Returns from fixed income (bonds) in 2024 were disappointing. Instead of a year where central banks really dialled up rate cuts and inflation collapsed, rate cuts were subdued, and inflation began to creep higher towards the end of the year.  

Markets were pricing in 1.5 percentage points of cuts in the US and UK – or six 0.25 point cuts. But in the US, they got three 0.25 point moves, and in the UK there was just two, taking rates to 4.75%.   

• Invest with ii: How Bonds & Gilts work | What is a Managed ISA? | Buy Bonds

Because interest rate cuts were priced into bond markets at the end of the last year, and they did not materialise in the ways markets expected, bond markets actually sold off this year (causing yields to rise) and most investors lost money even when accounting for coupon income.   

But not all bonds were affected in the same way by these market conditions. Here, we run through the top and bottom-performing bond funds in 2024 (data up to 27 December), and explain why some rose and some fell. We have included only funds available on interactive investor.  

Best bond funds in 2024 

One clear theme emerged among the winners: high-yield bonds. These bonds are issued by companies with lower credit ratings than their “investment-grade” peers, and so pay investors more to borrow money from them via bonds.  

This means yields are higher, but the risk of default is greater. High-yield bonds also tend to be issued with shorter lengths to maturity than other bonds, which makes their prices less sensitive to interest rate changes – this has helped performance this year as investors dialed back expectations for interest rate cuts. However, an economic downturn would be bad news for high-yield bond prices due to the elevated default risk.  

The best high-yield bond funds this year, returning a little over 10% each, were: Man Group Man High Yield Opportunities, Invesco High Yield, Schroder ISF Global High Yield and Schroder High Yield Opportunities. High-yield bonds yield about 8% at the moment, which compensates investors for the risk of an economic downturn. This shows that a large part of their return this year came from the income generated.  

• Watch our ii expert tip video: my bond market tip for 2025
• Watch our Jupiter Strategic Bond video: a 7% yield from global bonds

GAM Star Cat Bond was a strong performer, rising nearly 14%. Catastrophe bonds pay the issuer when there is a natural disaster in order to help them cover the costs associated with it, but come with high interest rates. Therefore cat bonds offer high yields and perform well when there are fewer natural disasters than anticipated.  

Other more unusual bond funds that did well this year were Titan Hybrid Capital Bond, as well as Invesco AT1 Capital Bond Ucits ETF. The Titan fund invests in bonds that rank below ordinary senior debt but above common equity, meaning that higher yields come with less protection if bonds default. The same is true of AT1 bonds, which come with higher yields for a lower ranking in the debt structure of a company.  

Man Sterling Corporate Bond is regular corporate bond fund investing at least 80% of the portfolio in investment-grade bonds. 

PIMCO Diversified Income Duration Hedged invests at least 80% of its portfolio in floating-rate bonds, meaning that rising interest rates can actually be positive for returns.

Source: FE FundInfo, total returns 1 January to 27 December 2024. Past performance is not a guide to future performance.

Worst bond funds in 2024

There was an even clearer theme among the worst-performing funds: nine of the bottom 10 invested in inflation-linked bonds. These included passive funds such as iShares £ Index-Linked Gilts UCITS ETF and active funds such as Fidelity Index Linked Bond.

These are bonds, generally issued by governments, where the coupon and principal amount of the bond are adjusted for inflation. 

While index-linked bonds give investors protection from inflation, the price of the bonds can swing dramatically before they mature. 

• Don’t be shy, ask ii….why is this inflation-linked bond fund losing money?
• Bond Watch: why investors got 2024 wrong

They generally mature over long periods, giving them a higher “duration” or sensitivity to interest rates than regular bonds. 

That means that the negative impact of higher-than-expected interest rates can outweigh the benefits of higher inflation.  

So, in 2024, as the expectation for fewer interest rate cuts were priced into markets and bond yields rose, inflation-linked bonds were some of the hardest hit. 

Investors were also caught out here in 2022, when interest rates rose from near zero, causing bond prices to crash, even as the coupons from inflation-linked bonds rose with the inflation rate. 

Templeton Global Bond invests in government bonds from around the world, but has been hurt by large allocations to emerging market bonds, like those issued by the Brazilian and South African governments.  

Source: FE FundInfo, total returns 1 January to 27 December 2024. Past performance is not a guide to future performance.