{"id":13496,"date":"2023-11-30T17:34:54","date_gmt":"2023-11-30T17:34:54","guid":{"rendered":"https:\/\/infundpros.com\/markets\/bonds-are-flashing-a-smile-after-historically-bad-stretch-a-promising-sign-for-2024\/"},"modified":"2023-11-30T17:34:55","modified_gmt":"2023-11-30T17:34:55","slug":"bonds-are-flashing-a-smile-after-historically-bad-stretch-a-promising-sign-for-2024","status":"publish","type":"post","link":"https:\/\/infundpros.com\/?p=13496","title":{"rendered":"Bonds are flashing a \u2018smile\u2019 after historically bad stretch, a promising sign for 2024"},"content":{"rendered":"
\n
<\/p>\n

<\/p>\n

<\/p>\n<\/figure><\/div>\n

No really, <\/em>2024 is looking like the \u201cyear of the bond.\u201d<\/p>\n

That\u2019s because a \u201csmile,\u201d or positive convexity, has been taking shape across the roughly $55 trillion\u00a0U.S. debt market after a brutal three years in bonds. It reflects growing optimism around the end of the Federal Reserve\u2019s interest-rate hikes, and an eventual pivot to rate cuts.<\/p>\n

\n

Convexity is a way to measure a bond\u2019s value based on shifting interest rates, by looking at yields and prices. A \u201cfrown\u201d forms as rates start to climb and bond prices sag. But the opposite tends to appear, a curve upward, as rates peak.<\/p>\n

\u201cAs the dollar price of bonds fall, convexity increases, which is good for investors,\u201d said\u00a0Mark Cernicky, managing director at\u00a0Principal\u00a0Asset Management.<\/p>\n

High convexity matters because it sets up investors to lose less money when bad things happen, like when interest rates rise, Cernicky said. It also means investors can make more money when good things, like rate cuts, happen, \u201ccausing them to smile rather than frown.\u201d <\/p>\n

Like the long-anticipated U.S. recession, the revival of returns in fixed income has yet to surface in a broad and convincing way. Economists and investors now increasingly see the possibility of a soft economic landing, or only a mild recession in 2024, despite the era of relatively cheap money apparently ending. <\/p>\n

Still, the protracted wait for a bond-market recovery has many investors parked in cash-like investments, including T-bills
\n BX:TMUBMUSD03M
\n that mature in a year or less, but kicking off 5% yields.<\/p>\n

Read<\/strong>: \u2018T-bill and chill\u2019 trade sees big influx from individual investors<\/p>\n

It helps that yields on T-bills are near their highest in almost two decades. The past three years also have been particularly cruel to holders of longer-duration, low-coupon bonds, which issuers flocked to in droves when borrowing costs were historically cheap. <\/p>\n

As evidence of this, the Bloomberg U.S. Aggregate index, a proxy for the broader U.S. bond market, was on pace for a negative-13.6% three-year return as of Tuesday, according to FactSet. <\/p>\n

It isn\u2019t hard to image why some remain skeptical that inflation will be sufficiently tamed or that next year will be significantly different for bonds.<\/p>\n

Convexity can be your friend, or it can work against you, said Lindsay Rosner, head of multisector fixed-income investing at Goldman Sachs Asset Management, in a phone call with MarketWatch.<\/p>\n

As Rosner pointed out, the \u201cAGG\u201d began the year with a roughly 4.65% yield, with starting yields often considered a good peg for investors to help gauge future returns.<\/p>\n

However, the AGG was most recently on pace for a 0.7% yearly return, according to FactSet data, mainly because the Federal Reserve kept jacking up its policy rate to a range of 5.25% to 5.5%. The related iShares Core U.S. Aggregate Bond ETF
\n AGG
\n is down 1.8% on the year so far.<\/p>\n

\u201cThat is truly the story of this year,\u201d Rosner said. \u201cThe Fed was continuing to increase rates because, with inflation, the beast has not been slayed yet.\u201d <\/p>\n

The consumer-price index for October showed inflating easing to a yearly 3.2% rate. But Fed officials continue to worry about a reacceleration of inflation, according to minutes of the Fed\u2019s early November policy meeting. The central bank voted at that meeting to keep rates unchanged at a 22-year high. The Fed has a 2% inflation target.<\/p>\n

For bond investors, however, convexity now sits in their corner heading into 2024, sparking hope that a historically bad stretch for U.S. bonds might be finally over.<\/p>\n

\u201cWe think we are in a very different place than a year ago,\u201d said Rosner, pointing out how convexity also helps measure the upside or downside risks in bonds. <\/p>\n

\u201cWhat are the chances the Fed hikes rates another 100 basis points?\u201d she said. <\/p>\n

Fed-funds futures traders have been expecting at least modest rate cuts by mid-2024, which would boost the appeal of longer-duration bonds with higher yields.<\/p>\n

Momentum appears to be building around the idea, with the popular iShares 20+ Year Treasury Bond ETF
\n TLT
\n seeing inflows surge this year, despite its \u201cfrankly terrible\u2019 returns.<\/p>\n

\u201cI would note that the biggest benefit of high convexity in bonds today is that investors should not wait until the Fed cuts to buy bonds,\u201d said Principal\u2019s Cernicky.<\/p>\n

\u201cYields will move lower in anticipation of a cut,\u201d he told MarketWatch.\u00a0\u201cAs yields fall, total return will increase and convexity will go down. The longer one waits, the smaller the drop in yields and lower the benefit of convexity.\u201d<\/p>\n<\/p><\/div>\n<\/div>\n

Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

No really, 2024 is looking like the \u201cyear of the bond.\u201d That\u2019s because a \u201csmile,\u201d or positive convexity, has been taking shape…<\/p>\n","protected":false},"author":1,"featured_media":13497,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[25],"tags":[],"class_list":{"0":"post-13496","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-markets"},"yoast_head":"\nBonds are flashing a \u2018smile\u2019 after historically bad stretch, a promising sign for 2024 | inFundPros<\/title>\n<meta name=\"description\" content=\"No really, 2024 is looking like the \u201cyear of the bond.\u201d That\u2019s because a \u201csmile,\u201d or positive convexity, has been taking shape across the roughly $55\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link 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