It Could Be a Great Time for Bonds

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Higher yields enable individual bonds to once again play their traditional role as sources of reliable, low-risk income for investors who buy and hold them to maturity.

It's been almost 20 years since bonds presented as attractive an opportunity as they are likely to in the second half of 2024. Economic conditions and changing monetary policy are combining to create an environment where high-quality, low-risk investment-grade bonds can deliver higher interest payments than they have in decades and more potential for capital appreciation than stocks or cash offer. Throw in bonds’ lower volatility than stocks and an increasing tendency to rise when stocks fall, and it’s easy to see why Fidelity and Pimco bond fund managers believe that fixed income now offers a once-in-a-generation opportunity for new-to-bonds investors to seek reliable income and a chance to grow their portfolios, and reduce risk.

To understand the opportunity they see in the second half of 2024, it’s important to first understand where bond returns come from. A bond can deliver return to its owner from 2 sources: interest payments known as coupons, whose rate is set at the time the bond is issued, and changes in the price of the bond as it trades in the market.

The interest rate of the coupon remains the same until the bond matures but the price can rise or fall throughout the trading day. Because bond prices typically rise when interest rates fall, the best way to earn a high total return from a bond or bond fund is to buy it when interest rates are high but about to come down. If you buy bonds toward the end of a period when rates are rising, you can lock in high coupon yields and also enjoy the increase in the market value of your bond once rates start to come down.

Now’s the time

Jeff Moore, manages the Fidelity® Investment-Grade Bond Fund (FBNDX), Fidelity® Investment-Grade Bond ETF (FIGB), and Fidelity® Tactical Bond ETF (FTBD). He believes that the second half of 2024 is likely to be a time when skilled bond investors will be able to do just that. He says that for the high-quality bonds that his fund buys, average yields are higher than they have been since before the 2008 global financial crisis, which ushered in a long period of near-zero interest rates and bond yields. “Right now, the average yield on the Bloomberg US Aggregate Bond Index is up to around 5%, and the yield for investment-grade corporate bonds is roughly 6%," says Moore. Those starting yields are a big reason why bonds should deliver attractive total returns during the rest of 2024 and beyond, regardless of where interest rates go. If the Federal Reserve lowers interest rates, which it’s expected to do, the interest payments on those bonds will be supplemented by higher market prices, which could boost the total return of the bonds closer to the average historical return of US stocks. Even if the Fed does something unexpected and leaves rates alone or raises them further, starting coupon yields are high enough to still deliver a positive return to bondholders.”

Moore isn’t alone in believing that the forecast looks bright for bonds in the second half of 2024. David Braun manages the PIMCO Active Bond Exchange-Traded Fund (BOND). He agrees with Moore and says, “The all-important starting yields are higher than they’ve been for a long time and interest rates are likely ready to come down, starting in the second half of 2024 and continuing into next year. That’s the combination we’ve been waiting for,” Braun says. “This is perhaps the most excited and bullish I've been on US core bonds in 15 years.”

Why bonds may be better than cash or stocks in the second half of 2024

Moore believes that bonds in the second half of 2024 present a unique and appealing opportunity for investors who have been sitting in money market funds or short-term CDs to not only lock in longer-term coupon income and seek potential capital appreciation, but also to reduce risk in their portfolios. While yields on cash-like assets such as CDs and money markets have risen to roughly 5% since the Fed began raising short-term interest rates in 2022, those yields are likely to move lower in the second half of 2024 and to stay lower than they have been over the past 2 years.

Says Braun, "I think the Fed is likely to cut once…maybe twice…in the latter part of this year. Next year it appears that they are set up to be even more aggressive, ultimately creating a less attractive backdrop for dollars that have been sitting on the sidelines in money markets and CDs.” That raises the risk that investors who need a certain level of income from their portfolios won’t get it if they stay in cash.

While the record-setting performance of the S&P 500 may look like a compelling solution for those who recognize the need to invest their cash, Moore points out that bonds are still relative bargains and may have more room to rise in price in the second half of 2024 than stocks, which have become expensive by historical standards over the past year. So if you are on the sidelines waiting in cash, it may be a good time to take advantage of the opportunities that current high yields are creating in bonds.

Back to normal at last?

According to Moore, bonds should become increasingly able in the second half of 2024 to play their historic role of delivering significant income and also of preserving capital by rising in price when stocks fall. He believes that the Fed holds the key to the return of “normal” bond markets and will be able to both lower interest rates and reduce the size of its balance sheet, which had become bloated as a result of massive purchases of government debt under its policy of “quantitative easing” to stimulate economic growth. That means that willing buyers and willing sellers—rather than government policies—will once again determine prices in financial markets. Since the 2008 financial crisis, the Fed has played an outsized role in markets, which has caused stocks and bonds to move up and down in tandem more than they have historically. “As these policies are wound down, bond markets should start to behave the way they have for most of history, rising when stocks fall and helping investors diversify and reduce risk in their portfolios,” he says.

Braun also expects the return of normal markets to benefit bond investors: “As rates follow inflation down and the Fed shrinks its balance sheet, that negative stock and bond correlation should start working again, and therefore the 60/40 allocation that we all grew up with is not dead after all. As the Fed goes back to being more of a referee and less of a player in the capital markets, the negative correlation between stocks and bonds should come back. It was never dead, it's just been distorted by $10 trillion of fiscal and monetary stimulus from Washington,” he says.

Beyond investment-grade bonds

While investment-grade bonds offer low risk and potential for attractive total returns in the second half of 2024, less familiar areas of the market are presenting opportunities for skilled managers to find attractively-priced assets with the potential to rise in price and deliver return to bondholders. While Moore has found opportunities in investment-grade corporate bonds, Braun sees diversified yield sources and attractive return potential in Fannie Mae and Freddie Mac mortgage-backed bonds, non-agency mortgage backed-securities, and securities backed by consumer credit cards, auto, and student loans. “There are tremendous opportunities for active managers in these asset classes in the second half of 2024," he says.


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