This year, market participants responded to the fears that initially developed in 2022, resulting in a year of seesawing yields. But we think 2024 will be anticipatory, with investors positioning themselves early in the year to weather out any storm. Learn why we think the bond market is favorably aligned for a new year.
This year has been a bit more tumultuous than we had envisioned, but it wasn’t quite as difficult as the calamitous 2022. We expected 2023 to be a transition year, with the themes of recession, rates, and returns. Perhaps pandemic-related distortions have taken longer to move through the economy than we forecasted. Inflation proved more stubborn and the economy more robust than we anticipated for much of this year, which contributed to a higher-for-longer bias in rates.
If our key themes for 2023 are only now coming to pass as we head toward 2024, what then to say about the year to come? With apologies to Fleetwood Mac fans, we say, “Don’t stop thinking about tomorrow.” If 2023 was reactionary, with market participants responding to the fears that emerged in 2022 and yields seesawing on data, then we think 2024 will be anticipatory. Market participants could become more convinced of the imminence of rate cuts and position themselves with greater conviction. In short, 2024 could be the year of FOMO.
What happened in fixed income in 2023?
In our opinion, some of the trends we anticipated may have been delayed. Returns may be back, since both the Bloomberg Municipal Bond Index and the Bloomberg US Aggregate Index have moved into positive territory in the fourth quarter. November is poised to be the strongest month of the year for these indexes, and December technicals favor further strength.
Rates may have peaked. The Federal Open Market Committee (FOMC) didn’t raise rates at its December 13 meeting, going six months with holding rates steady. While inflation remains above target, signs of a clear disinflationary trend have emerged. Consumer Price Index (CPI) year-over-year (YOY), running at 6.4% in January, was down to 3.2% in October. The unemployment rate hit a multi-decade low of 3.4% in January and inched up to 3.9%. The rate of increase in average hourly earnings has also dropped from 4.7% to 4.1%.
Recession remains a remote prospect, though, with the US economy continuing to post steady growth. The Atlanta Fed GDPNow forecast is calling for growth around 2.0% for the final quarter of the year. An inverted yield curve has historically been a reliable indicator of an impending recession, but the unique circumstances of the pandemic may have undone that. The jury is out.
When could investors get into bonds in 2024?
While there’s some uncertainty as to the timing of an entry point, being early has delivered exceptional returns in the past. Over the past 30 years, the 12-month period following the last rate hike has produced very attractive municipal and corporate bond returns. The table below shows the returns on the BofA US Municipal Securities Index and the BofA US Corporate Index over the 12 months following the last rate hike and the 12 months following the first rate cut. Investors benefited from acting sooner rather than later in each period. With 10-year US Treasury rates already 50 basis points (bps) lower than their recent October highs, we think the incentives are good for investors to put cash to work today.
Muni and corporate fixed income index performance after rate-hiking cycles
What’s ahead for fixed income in 2024?
The bottom line
Though entry points are never certain, getting into fixed income early has historically yielded great results for investors. We believe that risks and rewards are favorably aligned and that the most likely outcome is that 2024 could be a good year for bond investors.