Why Bonds Belong in Your Diversified Portfolio (Even Now)

Plus, the optimal fixed-income allocation in a high interest-rate environment.

Fixed-income investors, bonds are rising to the occasion and looking attractive again. Their yields are higher, and they have delivered as diversifiers against stock sell-offs this year. Yet, uncertainty has muddled the outlook as the bond market seeks clarity about tariffs, inflation, and interest rates.Paul Olmsted covers US fixed-income strategies for Morningstar Research Services. The senior manager research analyst explains why you need bonds for a balanced portfolio

01:00 Let’s start with how you’re thinking about the bond market in 2025. Can you talk about what you have considered key moments this year?



02:00 As a follow-up, what is at the core of the bond market’s concerns?



03:08 We’re recording this episode on July 30th around 10:30am. The Fed is expected to announce their interest-rate decision this afternoon. Market watchers are predicting the Fed will hold rates steady. High interest rates pose a risk to bonds. What other risks should investors watch out for now?



04:47 Some bond investors are seeking a “Powell hedge” due to expectations that Trump could oust the Fed Chair. What are they hedging against, and is this something everyday investors need to think about?



06:12 What’s the probability of Trump firing Powell before the Fed Chair’s term ends in May 2026, and who would be the ideal candidate?



07:32 We have talked about how the memory of the worst bond market ever in 2022 is still lingering. However, bonds served as diversifiers during stock sell-offs earlier this year. Why do you think bonds can’t shake the bad rap?



09:27 What’s the optimal bond allocation in a diversified portfolio during a high-rate environment? Should investors focus more on whether their holdings are short- or long-term, or is credit quality a bigger issue?



12:02 What are the best bonds for portfolio diversification?



13:36 What’s the takeaway for fixed-income investors for the rest of 2025?





Read about topics from this episode.

Investors Should Embrace Elevated Bond Yields https://www.morningstar.com/funds/inv...

3 Principles to Invest By, Whatever Comes Next https://www.morningstar.com/stocks/3-...

Why the Fed’s Independence Matters to Markets, the Economy, and Your Wallet https://www.morningstar.com/markets/w...

4 Top-Performing High-Yield Bond Funds https://www.morningstar.com/funds/4-t...

Tariffs and Dollar Weakness Tested US Resilience https://www.morningstar.com/markets/t...

Income Opportunities Remain at the Front End of the Yield Curve https://www.morningstar.com/funds/inc...



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Read what our team is writing.

Paul Olmsted https://www.morningstar.com/people/pa...

Ivanna Hampton https://www.morningstar.com/people/iv...



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