As the party came to a close for bonds in 2023, investors witnessed a strong year-end rally that drove up prices. However, the burning question remains: will this bullish trend continue into 2024?
Unfortunately, the start of the year has been less than ideal for both stocks and bonds. On Tuesday, the SPDR S&P 500 ETF Trust and iShares 20+ Year Treasury Bond ETF (TLT) experienced their worst start in decades, both falling by 0.6%. This hasn’t been seen since 2002.
Interestingly, TLT spent most of last year in negative territory, with a significant downswing of nearly 15% on a total return basis in early October. But the tides started to turn in late October, marking the beginning of one of the most aggressive rallies across markets in recent memory.
Deutsche Bank Research reported “massive” returns across various assets into the year’s end, effectively transforming bond losses into gains. In fact, TLT delivered impressive total returns of 8.67% in December alone, and for the fourth quarter, it was up by an astonishing 12.93% on a total return basis. Although it ended the year with overall gains of 2.77%, this trend seems to have taken a dip with a 0.6% decrease so far this year.
Meanwhile, the yield on the benchmark 10-year note, which determines global borrowing costs, briefly surpassed the 4% mark on Wednesday prior to the release of the Federal Reserve’s meeting minutes. The last time the yield reached above 4% was on December 13th. Since then, we have witnessed a decline in yields as expectations grew stronger for a rate cut later this year. Ultimately, the 10-year note settled at 3.905% on Wednesday.
It is important to note that bond yields and prices move in opposite directions. As a result, Daniel Wiener, the founder and former CEO of RWA Wealth Partners, expressed uncertainty about the future of yields. He stated, “We had that quick ride from 5% down to the current 3.9% or so on the 10-year, which gave you a pretty good return. Now what? I can’t see yields falling that much further so the recent bull market in bonds may be over. People forget that we had a 40-plus year bull run for bonds from the early 1980s. That’s not happening again. Not unless inflation goes through the roof.”
The Outlook for Bonds in 2024
Despite recent rallies, the outlook for bonds is still positive, according to experts at Alliance Bernstein and Vanguard. Alliance Bernstein, a leading asset manager, believes that even with the recent rally, U.S. 10-year Treasury yields of 3.9% are still very compelling. They note that although inflation is declining, it remains above the Federal Reserve’s target, suggesting rates will remain elevated throughout the second half of 2024. In light of this analysis, Alliance Bernstein suggests that now is an ideal time for bond investors to extend their duration to gain exposure to rates.
Vanguard echoes this sentiment, declaring that “bonds are back” thanks to higher interest rates. While bond investors have experienced short-term pain due to rising interest rates over the past two years, Vanguard points out that these higher interest payments offset declines in bond prices and ultimately lead to higher expected total returns over the long term. Additionally, reinvestments and new money flowing into fixed income are currently attractively valued.
However, both firms caution that volatility is still a factor to consider in the bond market. As a result, investors should prepare themselves for a potentially bumpy ride.
