In a year marked by volatility across global fixed-income markets, corporate bonds have emerged as the standout performer in 2025. The Vanguard Intermediate-Term Corporate Bond ETF (VCIT) has delivered an 8.3% total return year to date, edging out its long-term corporate peer, the Vanguard Long-Term Corporate Bond ETF (VCLT), which is up 8.2%. Both funds are well ahead of the broad investment-grade benchmark, the Vanguard Total Bond Market Index (BND), which has gained 6.2%. By contrast, the most defensive corner of the market has lagged: the iShares Short Maturity Treasury ETF (SHV), widely used as a cash proxy, has managed only a 3.1% return.
With the Federal Reserve cutting rates and the front end of the curve tethered to lower policy expectations, investors have been more willing to extend duration and accept credit exposure. This demand has compressed corporate spreads and reinforced flows into both intermediate and long-term maturities, where yields remain attractive relative to Treasuries. At the same time, the long end of the curve remains volatile: 10-year yields have swung as term premia rebuild, creating windows where corporate bonds have been bid both as a yield enhancer and as a perceived safe harbor against equity volatility.
That convexity shows up in 2025 performance splits. Intermediate corporates have led because they sit at the sweet spot of carry + modest duration, while long corporates have matched returns when the term premium slid (bull phases) and lagged when it rebuilt (bear steepeners). Put simply: when the curve bull-steepens (front end down, long end down less), long corporates benefit from duration; when it bear-steepens (front end anchored, 10-year up), they give back gains faster.
The rally in corporates highlights a strong near-term cushion but also narrowing margins of safety. Investment-grade spreads are now tight versus historical averages, leaving less room for error if inflation surprises to the upside or if the economy slips toward recession. The 2s10s yield curve, currently steepening after a long inversion, adds another layer of complexity: a sustained bear steepener could push long-term borrowing costs higher, weighing on valuations even as credit fundamentals remain solid.
Credit leadership is rational as carry + moderate duration has beaten cash. But with term and inflation premia one headline away from swinging 25–50 basis points, investors may want to protect gains by right-sizing duration, preferring intermediate investment-grade, and pairing it with liquidity sleeves that let you add on any rate-volatility shocks.
For commercial real estate investors and other spread-sensitive borrowers, lower front-end rates are providing near-term relief, but the risk of long-end volatility underscores the importance of timing refinancing and managing exposure to fixed-rate debt. Ultimately, corporate bonds’ strong returns this year demonstrate fixed income’s renewed value as a portfolio diversifier, but they also signal that selectivity and curve-aware strategies will be critical.
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