Where are bonds headed?
Although some volatility may continue, we believe interest rates have peaked. We expect lower Treasury yields and positive returns for investors in 2024. The case for lower interest rates in 2024 is straightforward, but the path is likely to be rocky.
Bond funds staged a fourth-quarter comeback in 2023. Through late October, the Morningstar US Core Bond Index, a proxy for the broad fixed-income market, was on pace for a third-consecutive year of losses as uncertainty around a hard or soft landing lingered and interest-rate volatility persisted.
Strong demand should support bonds in 2024
Many who left the bond market when yields were rising should return to lock in today's higher yields. The Bloomberg U.S. Aggregate Index currently has a yield of around 4.6%.
The U.S. Economy
In CBO's projections, that rate begins to decline in the second quarter of calendar year 2024. Interest rates on 10-year Treasury notes rise in 2024 and then fall through 2026. Inflation (as measured by the price index for personal consumption expenditures) slowed markedly in 2023.
I bonds issued from Nov. 1, 2023, to April 30, 2024, have a composite rate of 5.27%. That includes a 1.30% fixed rate and a 1.97% inflation rate. Because I bonds are fully backed by the U.S. government, they are considered a relatively safe investment.
In the second half of the year, we look for bond yields to continue to decline. The forces that have been pulling them lower—tightening monetary and fiscal policies—should continue. Treasuries with maturities of two years or longer likely will continue to decline.
Last year was highly unusual, but in 2023, bonds are behaving more normally. Over the long term, bonds are a great diversifier of equity stress. If the recession we are forecasting arrives before the end of this year, it pays to remember that bonds tend to outperform in a recession.
“Yields are fairly high now, and high-quality bonds that you hold to maturity are safe investments,” he said. Mr. Pozen added that well-diversified investment-grade bond funds make sense now, too, for prudent investors who are prepared to hold them for at least three years.
This points to a potential Fed pivot in late 2023 and heading into 2024. As such, multifamily owners and investors need to continue to watch their debt stack but may look at more short-term lending solutions as rates appear poised for a drop in the coming 12-24 months.
Investors' 10 year expected return stood at 7.2% in December 2023, slightly above the reading of 7.0% in October 2023. A second line shows the average stock market return that investors expect over the coming 12 months.
What is the 10 year treasury prediction for 2024?
"A naive midpoint of those two scenarios could see the 10-year yield rise to about 4.70% by the end of 2024," he added - the highest end-year forecast in the survey.
The composite rate for I bonds issued from November 2023 through April 2024 is 5.27%.
![Where are bonds headed? (2024)](https://i.ytimg.com/vi/aEoIVS7Cifw/hq720.jpg?sqp=-oaymwEcCNAFEJQDSFXyq4qpAw4IARUAAIhCGAFwAcABBg==&rs=AOn4CLAWI48G8qqv41zk4JwJRsIYGbj1CA)
Index | Current value | Date |
---|---|---|
US 10-Year Bond Yield Forecast Q1 2025 | 3.7 % | 06/02/2024 |
US 10-Year Bond Yield Forecast Q1 2026 | 3.5 % | 06/02/2024 |
US 10-Year Bond Yield Forecast Q2 2024 | 3.9 % | 06/02/2024 |
US 10-Year Bond Yield Forecast Q2 2025 | 3.5 % | 06/02/2024 |
That rate is currently set at 3.94%, annualized, for six months. It will adjust again on May 1, 2024, rolling into effect for all I Bonds, no matter when they were purchased. The current composite rate is 5.27% annualized for six months for purchases through April 2024.
Face Value | Purchase Amount | 20-Year Value (Purchased May 2000) |
---|---|---|
$50 Bond | $100 | $109.52 |
$100 Bond | $200 | $219.04 |
$500 Bond | $400 | $547.60 |
$1,000 Bond | $800 | $1,095.20 |
Including bonds in your investment mix makes sense even when interest rates may be rising. Bonds' interest component, a key aspect of total return, can help cushion price declines resulting from increasing interest rates.
Probably the top fixed income question we've received in 2023 is when it's appropriate to begin moving bond allocations from ultra-short-maturity bonds and money market funds back into core bonds. Gauging by 2024 rate hike expectations, the answer is probably sometime around now.
The fixed rate rose to 0.4% in November 2022 so any I bond purchased after that date should be held. Likewise, you may want to hold on to I bonds issued between May and October 2023. Those I bonds have a fixed rate of 0.9%, which is the highest fixed rate in 16 years.
Bond Market Performance Rebounds in 2023
This year to date, fixed-income returns are positive, with those bonds that trade with a credit spread having performed better than U.S. Treasuries.
If sold prior to maturity, market price may be higher or lower than what you paid for the bond, leading to a capital gain or loss. If bought and held to maturity investor is not affected by market risk.
Will bonds rebound in 2024?
Although some volatility may continue, we believe interest rates have peaked. We expect lower Treasury yields and positive returns for investors in 2024.
- ProShares High YieldInterest Rate Hedged (BATS:HYHG) ...
- PGIM Floating Rate Income ETF (NYSE:PFRL) ...
- Pacer Pacific Asset Floating Rate High Income ETF (NYSE:FLRT) ...
- ProShares UltraShort 20+ Year Treasury (NYSE:TBT) ...
- ProShares UltraPro Short 20+ Year Treasury (NYSE:TTT)
Key Takeaways. Both certificates of deposit (CDs) and bonds are considered safe-haven investments with modest returns and low risk. When interest rates are high, a CD may yield a better return than a bond. When interest rates are low, a bond may be the higher-paying investment.
Cons: Rates are variable, there's a lockup period and early withdrawal penalty, and there's a limit to how much you can invest. Only taxable accounts are allowed to invest in I bonds (i.e., no IRAs or 401(k) plans).
ETF | Expense ratio | Yield to maturity |
---|---|---|
JPMorgan Ultra-Short Income ETF (JPST) | 0.18% | 5.4% |
SPDR Portfolio Short Term Treasury ETF (SPTS) | 0.03% | 4.5% |
SPDR Portfolio Intermediate Term Treasury ETF (SPTI) | 0.03% | 4.2% |
SPDR Portfolio Long Term Treasury ETF (SPTL) | 0.03% | 4.5% |