In a turbulent year for the fixed-income market, corporate bonds have emerged as the top performer for the asset class in 2025, based on a set of ETFs through Thursday’s close (Sep. 18).

The Vanguard Intermediate-Term Corp Bond ETF (VCIT) is leading the field with an 8.3% total return year to date. Its long-term corporate counterpart (VCLT) is a close second-place performer this year via an 8.2% gain. Both funds are enjoying a solid lead over the US investment-grade bond benchmark via Vanguard Total Bond Market Index (BND), which is ahead by 6.2%.
 

The leadership in corporate bonds has unfolded in a generally bullish environment for fixed income in 2025. Despite a roller coaster of news that has roiled the market has at times, all the major bond sectors are posting gains this year. The weakest performer year to date: the iShares Short-Maturity Treasury ETF (SHV), a cash proxy, which is up 3.1%.

If the Federal Reserve’s reduction in its target rate announced this week marks the start of a new rate-cutting cycle, the bond market may be poised to extend its rally in the months ahead. Fed funds futures are pricing in a rate cut for each of the remaining two Fed meetings scheduled for October and December.

The question is whether the incoming inflation data will cooperate? Although the Fed is prioritizing the slowdown in the labor market as the bigger concern – thus the decision to cut rates on Wednesday – inflation is still running well above the central bank’s 2% inflation target.  

The Consumer Price Index rose 2.9% in August vs. the year-ago level, marking the fourth straight month of accelerating inflation and the highest pace since January. If inflation continues to increase, will the Fed continue to cut rates? Or would hotter inflation force the central bank to pivot to a hawkish stance to contain pricing pressure?

Hanging in the balance is the bond market’s rally this year.

Current expectations by Fed officials suggests a bullish tailwind will continue to blow. Most of the central bank’s policymakers expect interest rates will decline further from current levels.
 

A number of analysts note that while inflation is edging higher, the increase isn’t sharp or fast enough to warrant rate hikes, or even leaving rates steady. By contrast, the labor market’s slowdown is said to be a more pressing concern, and one that the Fed can address with a degree of efficacy.

“Unless you think you’re really dealing with a runaway inflation, you’re not going to risk a recession,” said Diane Swonk, chief US economist for the accounting firm KPMG.

Considering the Fed’s guidance in its latest expectations for lower rates in the near term, “it would be very unlikely that the Fed did not cut rates at both the upcoming October and December FOMC meetings,” predicts Tim Duy, Chief US Economist, SGH Macro Advisors, in a note sent to clients on Thursday.

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