Why is the 2024 outlook for the bond market shaping up to be positive, at least for some sectors?
The Federal Reserve says it expects to cut interest rates this year and bond income is finally above inflation rates.
Although the Fed hasn’t given specific timing for cutting rates, many observers view the bond market outlook as positive for 2024. The Fed’s goal is not to keep rates high, but to keep the economy in balance, said Paul Olmsted, a senior manager research analyst for Morningstar Research Services, in an interview. Higher rates increase the cost of capital, stressing highly levered companies, while at the same time putting a damper on inflation. “The challenge is to find that right balance in the economy between higher yields and lower inflation while maintaining some economic growth,” said Olmsted.
One thing the Fed doesn’t want to do is make rate-cut mistakes that could lead to a repeat of the 1970s. From 1972 through 1974, the Fed hiked interest rates dramatically. When the economy started slowing, it cut rates, but inflation started mounting rapidly again in about 1977. After Paul Volcker took over in 1979 as Fed Chair, he raised interest rates into the double digits to bring inflation under control. This triggered back-to-back recessions in the early 1980s.
Good Value in Fixed Income
“We’re seeing people who think there’s really good value in the bond market. And not because they think there’s going to be some particular precipitous decline in yields,” said Warren D. Pierson, CFA, managing director and co-chief investment officer of Baird Asset Management, during an interview. “The level of income that bonds are producing is really attractive compared to the likes of which you’ve not seen for over a decade or two. Real yields are positive again.”
