The poor performance by the bond market this year could turn around in 2019, says Kathy Jones, chief fixed income strategist at Charles Schwab.
"Inflation is still quite low," as are long-term inflation expectations, says Jones who spoke at this week's Schwab Impact conference in Washington.
Year to date, the iShares Core U.S. Aggregate Bond ETF, which provides exposure to investment-grade bonds including Treasuries, agencies and corporates, is down about 2% following a bull market in bonds that dates back to 1982, with only three down years in between (the last one was 2013).
"We're still in a low rate environment that will keep rates subdued," said Jones.
She says the 10-year Treasury yield, which has retreated from a recent high of 3.25%, is near its peak and the short-term federal funds rate will likely top out near 3%, following three more Fed rate hikes. (The current fed funds rates is set between a range of 2% and 2.25% and are expected to remain unchanged when Fed policymakers meet again next week.)
Given this outlook, Jones recommends that bond investors start to move out on the yield curve and take on more duration risk.
"The risk premia for bonds will return and recent losers could become winners," says Jones.
She recommends investment-grade bonds with maturities between two and seven years. At seven years investors get about 90% of the yield all the way out the curve, according to Jones.
