Each new year brings new investing issues and opportunities. After down years in 2021 and 2022, we saw a rebound in bond returns in 2023. Yields on 10-year Treasurys hit the 5% mark briefly. We also saw an inverted yield curve during 2023.
Interest rates promise to be a key issue in 2024 with the Federal Reserve having indicated at its December meeting that it would look to cut rates three times during the year. Bonds staged a comeback in 2023, with the Morningstar US Core Bond Total Return index posting a return of 5.31%, following losses in 2021 and 2022 of -1.61% and -12.99%, respectively.
With that in mind, let's look at what advisors and their clients should know about bonds and other fixed income investments in 2024.
2024 Bond Outlook at a Glance
The consensus points to the Fed having a tremendous influence on the performance of the bond market.
"The Fed will undoubtedly be the biggest driver of fixed income markets in 2024," Mike Sanders, a portfolio manager and head of fixed income at Madison Investments, said. "Rate cuts feel inevitable; it's just a matter of when and how many. Right now, the market and the Fed have differing expectations, which is creating volatility around every major economic data release."
In a recent report, Vanguard indicated that it expects U.S. bonds to return a nominal annualized 4.8% to 5.8% over the next decade. The fund giant's expectation for international bonds is a nominal annualized return of 4.7% to 5.7% over the same period.
"Client portfolios today should be roughly the value they were at the end of 2021 when the stock and bond market were near all-time highs," Jeremy Keil, a Milwaukee-based financial advisor, said. "The difference is that bond yields are roughly 3% higher today. Bonds are there to balance out the risk from stocks, and with much higher yields bonds are now a much better balancer for your clients."
Bond Investing in 2024
With rate cuts "on the horizon," Sanders said, "a lot of the advisors we are talking to are asking whether now is the time to add duration. Unlike the past 15 years or so, you don't need to take on a lot of risk (including duration, or interest rate risk) to earn a decent yield. Credit spreads remain very tight, and the yield you can earn when adjusted for duration favors high-quality intermediate bonds. So, investors are not really being paid to take on credit or interest rate risk."
Others have said that 2024 might be the time to invest toward the longer end of the risk-return spectrum. In a December article, for example, Morningstar indicated that investors are best off locking in current high interest rates and investing at the outer end of the spectrum.
What Is Duration?
Duration is a measurement of the sensitivity of the price of a bond to changes in interest rates. Individual bonds or bond mutual funds and exchange-traded funds with a longer duration will be most price sensitive to rate changes.
The main factors influencing a bond's duration are time to maturity and its coupon rate. In general, the longer the time to maturity, the higher the duration. The higher the bond's coupon rate, the lower the duration, all else being equal. For example:
