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/investors-should-embrace-elevated-bond-yields

3 Principles to Invest By, Whatever Comes Next https://www.morningstar.com/stocks/3-principles-invest-by-whatever-comes-next

Why the Fed’s Independence Matters to Markets, the Economy, and Your Wallet https://www.morningstar.com/markets/why-feds-independence-matters-markets-economy-your-wallet

4 Top-Performing High-Yield Bond Funds https://www.morningstar.com/funds/4-top-performing-high-yield-bond-funds

Tariffs and Dollar Weakness Tested US Resilience https://www.morningstar.com/markets/tariffs-dollar-weakness-tested-us-resilience

Income Opportunities Remain at the Front End of the Yield Curve https://www.morningstar.com/funds/income-opportunities-remain-front-end-yield-curve

What to watch from Morningstar.

Covered-Call ETFs Are Booming. But Not All Yield Is Good https://youtu.be/eSOa8Tq3sEI?si=r5sXIMREbLWmk44b

This Dividend Investing Strategy Deserves a Second Look https://youtu.be/LbmauGl72ak?si=9ME4QGUkBTJgADLy