The US bond market has had a rough ride for much of the past two years, but the powerful rally over the last two months suggests the worst is over. Cherry-picking analytics from the recent crop of 2024 outlooks that are seasonal standards this time of year provides inspiration for thinking that the new year could reverse more (all?) of the damage inflicted on fixed income since the Federal Reserve starting raising interest rates in March 2022.
An ETF proxy for the US bond market, Vanguard Total Bond Market (BND), has rallied sharply, but it’s still far below 2021 levels. The bullish interpretation: there’s still plenty of room to run, assuming macro conditions are supportive.
The critical factor for bond prices in the year ahead, of course, is inflation’s path. Recent history provides support for expecting that pricing pressure will continue to ease and move closer to the Federal Reserve’s 2% target.
The Wall Street Journal reports: “The Federal Reserve is winning its fight over inflation, boosting Americans’ spirits and offering greater reassurance that the U.S. economy can avoid a recession while bringing prices under control. The Fed’s preferred inflation measure, the personal-consumption expenditures price index, fell 0.1% in November from the previous month, the first decline since April 2020, the Commerce Department said Friday. Prices were up 2.6% on the year, not far from the Fed’s 2% target.”
Andrew Hunter, deputy chief U.S. economist at Capital Economics, advises: “Adding in the further sharp slowdown in rent inflation still in the pipeline, it’s hard to see any credible reason why the annual inflation rate won’t also return to the 2% target over the coming months.”
The Federal Reserve appears to be on board with the upbeat outlook. Courtesy of a chart from JP Morgan, the Fed’s current outlook sees inflation and its target rate sliding in the months ahead.
MG Investments sees opportunity in the expected trend. “The rationale for adding duration now is underpinned by our belief that both the timing and valuations are favorable for investing in government bond markets,” the firm explains in its 2024 outlook. “Historically, the 10-year US Treasury yield has tended to rally after the Federal Reserve (the Fed) ends its hiking cycles. Research from Deutsche Bank shows that the biggest fall is typically seen within three months of the last hike – this has even been as much as 3 percentage points, equivalent to a capital gain of around 7% (Figure 1).”
Pimco advises that this is “Prime Time For Bonds.” In its November asset allocation report, analysts wreite: “We strongly favor fixed income in multi-asset portfolios. Given current valuations and an outlook for challenging economic growth and diminishing inflation, we believe bonds have rarely appeared more compelling than equities. We also look to maintain portfolio flexibility in light of macro and market risks.”
A key part of Pimco’s reasoning for favoring bonds over stocks: valuation. “Although not always a perfect indicator, the starting levels of bond yields or equity multiples historically have tended to signal future returns.”
The one-two factors of lower expected inflation and projections of Fed rate cuts are at the core of the bulls’ forecasts for higher bond prices. Fed funds futures are pricing in a 77% probability that that the first rate will arrive at the March 20 FOMC meeting.
If there’s a joker in the deck, it will reveal itself in the form an upside surprises in incoming inflation data. For the moment, however, a number of inflation projections and surveys suggest the fix is in for 2024 and pricing pressure will continue to ease.
“Although some volatility may continue, we believe interest rates have peaked,” predicts Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research. “We expect lower Treasury yields and positive returns for investors in 2024.”
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FAQs
Investment-grade corporate bonds remain attractive given their lower risk and relatively high yields. Long-term investors who can handle volatility might consider high-yield bonds and preferred securities, but we wouldn't suggest large positions in either.
Will bond ETFs go up in 2024? ›
Price Appreciation Potential and Recession Hedge
If interest rates decline in 2024, the market value of bond ETFs will likely increase, as prices move in the opposite direction of rates.
What is the forecast for the bond market? ›
Vanguard's forecasts show there's a 50% chance that U.S. aggregate bonds will return about as much over the next five years as U.S. equities— 4.3% for bonds versus 4.5% for stocks—with one-third of the median volatility.
Is it a good time to buy bond funds now? ›
Answer: Now may be the perfect time to invest in bonds. Yields are at levels you could only dream of 15 years ago, so you'd be locking in substantial, regular income. And, of course, bonds act as a diversifier to your stock portfolio.
Should I sell my I bonds now? ›
Remember, when you cash out your I Bonds you don't earn the interest until you complete the month and that you lose the prior 3 months' interest. If you want to keep all your good interest and get the most out of your I Bonds you should cash out: after earning 3 months of lower interest and.
What is the stock market expected to do in 2024? ›
Overall, Yardeni Research forecasts S&P 500 operating earnings at $250 in 2024, up 12% vs 2023. He puts them at $270 in 2025 (up 8%) and $300 in 2026 (up 11.1%). These figures compare with analysts' consensus forecasts of $244.70 in 2024, $279.70 in 2025 and $314.80 in 2026.
What will the I bond rate be in May 2024? ›
The 4.28% composite rate for I bonds issued from May 2024 through October 2024 applies for the first six months after the issue date. The composite rate combines a 1.30% fixed rate of return with the 2.96% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U).
Will bonds ever recover? ›
The table on the right shows that bond prices often recover within 8 to 12 months. Unnerved investors that are selling their bond funds risk missing out when bond returns recover. It is important to acknowledge that some of those strong recoveries were helped by bond yields that were higher than they are today.
What is the safest bond to invest in? ›
Treasurys are generally considered "risk-free" since the federal government guarantees them and has never (yet) defaulted. These government bonds are often best for investors seeking a safe haven for their money, particularly during volatile market periods. They offer high liquidity due to an active secondary market.
Should you sell bonds when interest rates rise? ›
If bond yields rise, existing bonds lose value. The change in bond values only relates to a bond's price on the open market, meaning if the bond is sold before maturity, the seller will obtain a higher or lower price for the bond compared to its face value, depending on current interest rates.
As with any free-market economy, bond prices are affected by supply and demand. Bonds are issued initially at par value, or $100. 1 In the secondary market, a bond's price can fluctuate. The most influential factors that affect a bond's price are yield, prevailing interest rates, and the bond's rating.
Does the bond market go up when the stock market goes down? ›
During periods of economic expansion, bond prices and the stock market move in opposite directions because they are competing for capital. Selling in the stock market leads to higher bond prices and lower yields as money moves into the bond market.
What is the outlook for bonds in 2024? ›
Starting yields, potential rate cuts and a return to contrasting performance for stocks and bonds could mean an attractive environment for fixed income in 2024.
Should I wait to cash in bonds? ›
Depending on the interest rate of your bond and your own financial needs, it's generally beneficial to wait until full maturity to redeem them.
What is the best treasury bond to buy right now? ›
7 Best Treasury ETFs to Buy Now
| ETF | Expense Ratio | Yield to Maturity |
|---|
| Vanguard Intermediate-Term Treasury ETF (ticker: VGIT) | 0.04% | 4.7% |
| Vanguard Short-Term Treasury ETF (VGSH) | 0.04% | 5.1% |
| Vanguard Long-Term Treasury ETF (VGLT) | 0.04% | 4.9% |
| iShares U.S. Treasury Bond ETF (GOVT) | 0.05% | 4.7% |
3 more rowsJun 11, 2024
The United States 10 Years Government Bond Yield is expected to be 4.206% by the end of September 2024. It would mean a decrease of 5.1 bp, if compared to last quotation (4.257%, last update 23 Jun 2024 2:15 GMT+0).
What is the economic outlook for 2024? ›
The global economy is continuing growing at a modest pace, according to the OECD's latest Economic Outlook. The Economic Outlook projects steady global GDP growth of 3.1% in 2024, the same as the 3.1% in 2023, followed by a slight pick-up to 3.2% in 2025.
What is the outlook for municipal bonds in 2024? ›
As we enter the second half of 2024, we remain optimistic on municipal bonds given the attractive level of yields, strong fundamentals, improving technicals, and are finding attractive opportunities within the municipal yield curve.
What is the forecast for the 20 year Treasury bond? ›
The United States 20 Years Government Bond Yield is expected to be 4.455% by the end of September 2024.
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