For Bond Investors, Delayed Rate Cuts Demand a Different Playbook
Not a recommendation, but I did notice that this has become a recurring current theme on financial news sites. So trying to understand it, as I've always been lurched by bond recommendations. I don't think I ever made a penny.
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For Bond Investors, Delayed Rate Cuts Demand a Different Playbook
https://www.morningstar.com/markets/bond-investors-delayed-rate-cuts-demand-different-playbook
The market no longer seems primed for a major bond rally the way it did at the end of 2023. But that doesn’t mean there aren’t opportunities in fixed income. Strategists point to the short end of the curve as the most attractive, and they say it’s not too soon to start locking in higher yields, even if rates remain steady for the next few months. Here’s everything investors need to know.
Bond Yields Jump On Sticky Inflation
The yield on the 10-year Treasury note has been steadily climbing since January as markets come to grips with a new reality. Improvement in inflation has stalled, and as a result, interest rates will likely remain higher for longer than previously thought.
The market no longer seems primed for a major bond rally the way it did at the end of 2023. But that doesn’t mean there aren’t opportunities in fixed income. Strategists point to the short end of the curve as the most attractive, and they say it’s not too soon to start locking in higher yields, even if rates remain steady for the next few months. Here’s everything investors need to know.
Bond Yields Jump On Sticky Inflation
The yield on the 10-year Treasury note has been steadily climbing since January as markets come to grips with a new reality. Improvement in inflation has stalled, and as a result, interest rates will likely remain higher for longer than previously thought.
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Bond outlook: Opportunities emerge as Fed delays rate cuts
https://www.capitalgroup.com/advisor/insights/articles/2024-midyear-bond-outlook.html
As the economy has chugged along and demand from investors has remained strong, the spread, or yield differential, between credit assets and U.S. Treasuries has narrowed significantly. As such, the greater return potential for bonds with credit risk comes not from possible spread tightening, but a decline in interest rates.
“Given the recent tightening in corporate bond spreads, we are seeing better opportunities in higher quality sectors with attractive yields such as securitized credit and agency mortgage-backed securities (MBS),” Gonzales says. Higher coupon mortgage bonds are particularly attractive. These bonds are unlikely to get refinanced ahead of their maturity given prevailing mortgage rates of roughly 7%.
Supply dynamics also work in their favor. Namely, home sales have slowed as homeowners decline to sell, clinging to pandemic-era mortgage rates.
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Investors queued up for US high-yield bond funds as rate cut hopes grow
https://www.reuters.com/markets/rates-bonds/investors-queued-up-us-high-yield-bond-funds-rate-cut-hopes-grow-2024-06-06/
"Combined with the attractive outright yields available, compared to 5 and 10-year averages, we are seeing investor confidence that strong corporate profits, together with an easing Fed, should provide an environment for default expectations to decrease," said Chris Romanelli, portfolio manager at Loomis Sayles.
He also added that the expectations for Fed rate cuts have helped to fuel demand for floating rate credit which has increasingly been utilized in high yield bond funds.
S&P Global Ratings expects the U.S. trailing 12-month speculative-grade corporate default rate to fall to 4.5% by March 2025, from 4.9% in April 2024.
Last month, the iShares iBoxx $ High Yield Corporate Bond ETF led the pack with approximately $1.99 billion in inflows. Meanwhile, the iShares Broad USD High Yield Corporate Bond ETF and SPDR Portfolio High Yield Bond ETF garnered $1.09 billion and $537 million in net inflows, respectively.
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Last edited Mon Jun 17, 2024, 12:27 PM - Edit history (1)
https://www.msn.com/en-us/money/markets/stocks-are-sexy-but-these-market-gurus-see-a-generational-opportunity-in-bonds/ar-BB1ojlJMIt’s now been 46 months since the bond market last reached a record high, and the Bloomberg Aggregate Bond Index is down roughly 50% from that July 2020 peak. But with bonds finally offering solid yields, some of the world’s top fixed-income investors believe this is the best time in a generation to get into bonds.
The price is down 50%, but with interest, the total return is not down that much. Still its down double digits.
I took a look a couple months ago at the S&P 500 compared to one of my intermediate term bond investments, which is probably representative of most of what I have in the fixed income area, and this is what I found:
The purchasing power of S&P 500 (as represented by VFIAX) is up 12.90% while that of VCOBX bond fund is down 21.78% in the 3 years to 4/9/24 . Those are total returns, including reinvested dividends and interest, and then adjusted for inflation.
https://www.morningstar.com/funds/xnas/vfiax/chart
https://www.morningstar.com/funds/xnas/vcobx/chart
CPI: https://data.bls.gov/timeseries/CUSR0000SA0
Back to the article:
After investors lock in those yields, bond prices could also rally when the Fed starts cutting rates later this year or next. It's a golden opportunity for a mix of steady income and price appreciation, according to these bond market gurus.
Persson, who is forecasting one or two rate cuts this year, said that if the economy starts to crack, the Fed will have to cut aggressively. “And then you get the total return aspect, or the capital appreciation side, of that investment,” he told Fortune, adding that “in most scenarios, you're seeing a pretty healthy return potential here over the next 12 months.”
There is also evidence that bonds could still outperform even if interest rates stay where they are, with the Fed maintaining its current wait-and-see mode for longer than expected. In a note to clients last summer, LPL Financial’s chief fixed income strategist, Lawrence Gillum, noted that the Bloomberg Aggregate Bond Index has performed well during periods when the Fed has paused its rate hikes historically.
Anyway, the upshot is that in years of increasing inflation, existing bonds and bond funds go down because investors can find newer higher yielding bonds. In years when inflation is falling, the opposite occurs. Unfortunately I've not seen much of the latter, even though inflation has fallen from 9% or so year-over-year in mid-2022, to 3.2% for the CPI. My bond funds surged by more than 10% or so in the 3 months from a low point in October until February or so when the awful January inflation report came in, and then my bond funds fell most of the way back.
Anyhow I think inflation is cooling again and expect total returns will be well above the current yields.
Aside: here are the latest inflation graphs of the CPI, PCE, and PPI, both regular and core variations:
https://www.democraticunderground.com/10143256073#post2
I'm an old guy and I just cannot, with maybe 10 years to live, have all my money in stocks, despite their obviously superior return over the long run:
Over the past 20 years, it has grown 6.25 fold, an average annual increase of 9.6%/year
Over the past 50 years, it has grown 193 fold, an average annual increase of 11.1%/year
and so on
I am repeating the above link below to be in clickable scrapable text form:
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html
It also has columns for bonds and Tbills. That page is cited in the article too.
I'm a 60:40 equity to fixed income investor, a ratio which is actually higher equity-wise than is recommended for people my age, from what I've seen.
Thanks much for the topic and articles
