{"id":11383,"date":"2023-11-08T23:32:14","date_gmt":"2023-11-08T23:32:14","guid":{"rendered":"https:\/\/infundpros.com\/news\/an-inflection-point-for-bonds-2024-fixed-income-outlook\/"},"modified":"2023-11-08T23:32:15","modified_gmt":"2023-11-08T23:32:15","slug":"an-inflection-point-for-bonds-2024-fixed-income-outlook","status":"publish","type":"post","link":"https:\/\/infundpros.com\/?p=11383","title":{"rendered":"An Inflection Point For Bonds: 2024 Fixed-Income Outlook"},"content":{"rendered":"
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By Gene Tannuzzo, CFA, Global Head of Fixed Income<\/em><\/p>\n

You don’t have to be bearish on the economy to be optimistic on the bond market. Here\u2019s why.<\/strong><\/p>\n

As we head into 2024, we think that the next phase for the Federal Reserve is likely a pause while the central bank assesses the impact of the tighter lending and financial conditions it\u2019s established. Investors should expect a lot of talk about whether the Fed will achieve a soft landing, but bond investors have the potential to generate attractive returns either way. Here\u2019s our rationale:<\/span><\/p>\n

Bonds have performed well around Fed pauses<\/strong><\/h2>\n

Typically, Fed pauses like this last less than a year, and it doesn\u2019t take a cut in rates for bonds to rally. History suggests that when the Fed reaches the peak of its rate hike cycle, overall bond performance in the period afterward is exceptional.<\/span><\/p>\n

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We\u2019re not in the hard landing camp, but given the unknown magnitude of an economic slowdown and the level of inflation, we think where investors are on the quality spectrum will make a difference. While lower rated bonds have been strong performers in 2023, we think the market is going to be more discerning as we head into 2024. We expect higher quality bonds will be the best bond performers over the next year.<\/p>\n

We also think performance will be more dispersed than it has been. As we enter a higher-for-longer rate environment, we should see more separation between the winners and the losers – especially in lower quality segments of the market. This will make credit selection more important, which is one of our core strengths.<\/p>\n

Investors can lock in higher rates for the long term<\/strong><\/h2>\n

Bond yields have risen to levels we haven\u2019t seen in decades. We think investors shouldn\u2019t miss the opportunity to lock in higher yields for the long term (not to mention the total return potential as prices on those bonds rise). It\u2019s also a great incentive to move out of cash. There’s been a money market renaissance as investors realized they can own cash and get a competitive yield. The attractiveness of cash will start to fade when short-term interest rates move lower and the diversification benefits of owning high-quality, long-term bonds at higher yields start to make more sense.<\/p>\n

Opportunities in municipal bonds are even more attractive when you consider the effect of taxes, especially in high tax states, where tax equivalent yields on high-quality munis create a further incentive. Underlying municipality fundamentals are generally healthy, but we\u2019re cautious on high-yield munis, which are not offering yields that much higher than better quality bonds for the added risk.<\/p>\n

Looking outside U.S. markets, opportunities may be even more striking in Europe, despite lower absolute yields. Unlike the U.S., they\u2019re coming off not just near-zero interest rates, but negative rates. Now, we\u2019re not only seeing positive real interest rates, but also wider credit spreads. That means you\u2019re going to get more risk premium for a similarly rated bond in Europe than you would in the U.S.<\/p>\n

There\u2019s more than one way to take advantage<\/strong><\/h2>\n

There are several paths to invest in the bond market in 2024, depending on how you feel about the economy:<\/p>\n