With inflation slowing and central banks continuing to lower their key interest rates, a new debt cycle is underway. In this context, bonds can earn interest, and not just as a source of yield.
In this article, we’ll explore why a drop in interest rates leads to a rise in the prices of existing bonds, a principle that’s sometimes misunderstood. Also, discover our explanations on how to invest wisely in bonds on the stock market, an often little-known investment, but one that could become strategic again in 2025.
Rates and bonds have an inverse link too often overlooked.
Investors typically gravitate toward bonds when interest rates rise, as they offer a more attractive return on their investments. But what’s less well known is that bonds can also offer great opportunities when rates fall. As a reminder, a bond is a loan you make to a government or a company in exchange for a fixed interest rate, called a coupon. If you buy a bond today that yields 5%, and tomorrow the new bonds only offer 3%, your investment (the bond security) becomes more attractive on the secondary market. Your bond will therefore increase in value, because other investors will be willing to buy it back at a higher price to take advantage of its higher yield. So this is an important rule to remember: when interest rates fall, the price of existing bonds tends to rise. Conversely, if rates rise, these same bonds will lose value. This effect is even more pronounced for long-term bonds, as their rates are “fixed” for a longer period. This is why, in a context of falling rates like the one we are experiencing in 2025, bonds can once again become a strategic investment for your portfolio.
Bonds are not just defensive investments
Bonds are often associated with defensive investments, and for good reason. When an investor buys a bond and holds it to maturity, they know its yield from the start, via the coupons paid regularly, and they recover the loaned capital at the end, unless the issuer defaults. Regardless of market fluctuations or economic upheavals, as long as the issuer repays, the scenario is locked in. But this view reflects only one use of bonds. On the secondary market, bonds can also become trading tools. An investor who understands the cycles of interest rates set by central banks can profit from changes in bond prices. When rates fall, some bonds increase in value; when they rise, others lose it. By buying or selling at the right time, it is therefore possible to generate capital gains, sometimes higher than the nominal rate of the bond. Bonds are therefore not reserved only for cautious profiles, and they can also appeal to more active investors, capable of anticipating rate movements.
How to take advantage of the rate cut cycle? Our professional advice
In a cycle of falling interest rates, bonds already issued with high coupons increase in value. To take advantage of this, it is often wise to favor bonds with a long maturity (or duration, which are more sensitive to interest rate fluctuations. The choice between government bonds and corporate bonds will depend on your risk profile, as the former generally offer more security, while the latter, especially those with higher ratings, can offer better returns with measured risk.
Regarding the investment method, you have two options: direct bonds, ideal if you want to select the issuers, maturities, and currencies yourself (especially via an online broker like Freedom24, which offers a wide selection), or bond ETFs, more suitable if you are looking for a turnkey, diversified, listed solution. The latter also react to changes in rates, but with an often diluted effect. In summary, to make the most of a falling interest rate environment, it is advisable to target long-term, high-yielding bonds and adapt the investment method to your level of involvement and risk tolerance.
What strategy should you adopt for investing in bonds in 2025? Our concrete examples
In 2025, with the gradual decline in key rates (from the ECB and soon from the FED), a savvy investor can take advantage of this cycle by buying well-rated long-term bonds, which still have an attractive yield today but whose price could rise if rates continue to fall.
The idea is not necessarily to hold these bonds until maturity, but to resell them at a profit in a few quarters, when their value has increased.
This strategy can be implemented with direct bonds, such as the General Electric 2032 at 3.55%, or through fixed-maturity ETFs, such as the iShares iBonds Dec 2028 Term EUR Corporate ETF (IB28), which offer immediate diversification on a basket of bonds until 2028.
How to invest in bonds in practice?
You can invest in bonds with one of the best stock brokers like Freedom24, which provides easy access to direct bonds or bond ETFs. Once your Freedom24 securities account is open and funded, you can go to the “Market” section, then filter products by clicking on “Bonds.” The interface allows you to easily select securities based on several criteria essential to a good bond strategy:
- term to maturity,
- type of issuer (State or company),
- credit rating (from AAA to BB, for example),
- yield to maturity,
- currency of issue (important to take into account for exchange rate risk),
- or even a sector of activity.
As we have seen, you can target, for example, BBB-rated corporate bonds maturing in 2032, to take full advantage of a cycle of falling rates.
Each bond has a detailed sheet with key information:
- annual coupon,
- repayment date,
- frequency of payments,
- rating,
- and current price.
Once you have selected the bond, simply indicate the amount you wish to invest (generally starting from $1,000), then confirm your purchase order. You will then receive your coupons according to the planned frequency (often semi-annually), and can choose either to keep the bond until its maturity or to resell it at any time on the secondary market, particularly if its value increases as part of a downward movement in rates. With over 147,000 bonds available, Freedom24 brokerage is a great entry point for building a tailored bond strategy, whether you’re a cautious or more active investor.
