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.

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?

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

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?

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?

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?

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?

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?