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
We're optimistic for 2024 and encourage investors to get off the sidelines and fully invest in the bond markets. Today's high yields and potential return opportunities will be hard to beat. The tide has turned for bonds.
How is the bond market doing in 2024? ›
Heading into 2024, bond investors were sitting pretty. Yields were near their highest levels in decades, offering attractive income. Meanwhile, the potential for a slowing economy and expectations for upwards of five interest rate cuts by the Fed offered potential profit from rising bond prices.
Are I bonds a good investment in 2024? ›
June 2024 I Bond Fixed Rate is 1.30%!
If you liked having I Bonds and matching inflation then you might love having I Bonds that beat inflation over the next 30 years. The current fixed rate of 1.30% is one of the best fixed rates in the past 21 years.
What is the debt market outlook for 2024? ›
Significant growth of bond debt around the world
Total OECD government bond debt is projected to increase to USD 56 trillion in 2024, an increase of USD 30 trillion compared to 2008.
What is the stock market outlook for 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 is the bond forecast for the next 5 years? ›
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 be in the bond market? ›
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.
What are the expected I bond rates for 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).
Should I wait until May to buy I bonds? ›
If you buy I bonds now, you'll receive 5.27% annual interest for six months and the new May rate for the following six months. He suggests buying a few days before April 30. Enna expects the fixed rate will be 1.2% or 1.3% in May, based on the half-year average of real yields for 5- and 10-year TIPS.
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.
GDP growth in the United States is projected to be 2.6% in 2024, before slowing to 1.8% in 2025 as the economy adapts to high borrowing costs and moderating domestic demand.
Who is buying US treasuries now? ›
The buyer base for US Treasuries has shifted from yield-insensitive buyers (sovereign wealth funds and central banks, including the Fed) to yield-sensitive buyers (US households, US pensions, US insurance), see chart below.
Who is buying US debt in 2024? ›
| Characteristic | Securities in billion U.S. dollars |
|---|
| Japan | 1,153.1 |
| China, Mainland | 797.7 |
| United Kingdom | 753.5 |
| Luxembourg | 376.5 |
9 more rowsMay 24, 2024
5 Best long term investments
| Investment vehicle | Recommended provider |
|---|
| 1. Exchange Traded Funds (ETFs) | J.P. Morgan Self-Directed Investing Platform |
| 2. Dividend Stocks | M1 Finance |
| 3. Short-term Bonds | Public App |
| 4. Real Estate | RealtyMogul |
1 more rowJoin Our Market Watch Newsletter!
| Stock | Politician | Filed |
|---|
| DHR Danaher Corp | Whitehouse, Sheldon D Senate | May 20, 2024 |
| RTX Rtx Corporation Common Stock | Whitehouse, Sheldon D Senate | May 20, 2024 |
| NVS Novartis Ag Adr | Whitehouse, Sheldon D Senate | May 20, 2024 |
| NVDA Nvidia Corporation - Common Stock | Tuberville, Tommy R Senate | May 15, 2024 |
47 more rowsOptimistic: 6%-7% per year.
If you assume margins and P/E multiples will remain at their current high level, and expect sales and buybacks to grow at their historical rates, then you can anticipate making about 6% in returns per year over the next decade.
Will interest rates continue to rise in 2024? ›
In our baseline, slower growth and a weaker labor market help to rein in inflation while the economy throttles back but avoids stalling. Our baseline scenario has one Federal Reserve rate cut towards the end of the year. As a result, we expect mortgage rates to remain elevated through most of 2024.
What is the best bond to buy in 2024? ›
17 Best Bond Funds for Rebalancing in 2024
- iShares Core US Aggregate Bond ETF AGG.
- JPMorgan Core Bond JCBUX.
- JPMorgan Mortgage-Backed Securities JMBUX.
- Loomis Sayles Core Plus Bond NEFRX.
- PGIM Total Return Bond PTRQX.
- Vanguard Total Bond Market ETF BND.
- Vanguard Total Bond Market Index VBTIX.
Two-year Treasury yields, which reflect market expectations for the federal funds rate one year in the future, are likely to remain below 5% and could ease back to the 4.25% to 4.40% region as expectations for Fed rate cuts shift. Ten-year Treasury yields have room to move down to the 4.0% to 4.25% region, in our view.
What is the credit market outlook for 2024? ›
Looking at 2024, there is room for more optimism in the credit space, with expectations for strong total returns and continued demand from investors seeking high-quality duration and longer-maturity investment solutions, supported by anticipated interest rate cuts by major central banks.
