What are bonds expected to do in 2023?
Investing in Bonds in 2023
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.
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.
As for fixed income, we expect a strong bounce-back year to play out over the course of 2024. When bond yields are high, the income earned is often enough to offset most price fluctuations. In fact, for the 10-year Treasury to deliver a negative return in 2024, the yield would have to rise to 5.3 percent.
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.
Investing in Bonds in 2023
Begin to lengthen duration in second-half 2023. Monetary policy: One last rate hike will conclude this tightening cycle. Long-term interest rates projected to be at, or near, their peak and will decline going forward.
“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.
Yields to Trend Lower
Key central bank rates and bond yields remain high globally and are likely to remain elevated well into 2024 before retreating. Further, the chance of higher policy rates from here is slim; the potential for rates to decline is much higher.
If bond yields rise, existing bonds lose value. The change in bond values only relates to a bond's price on the open market, meaning if the bond is sold before maturity, the seller will obtain a higher or lower price for the bond compared to its face value, depending on current interest rates.
| Face Value | Purchase Amount | 30-Year Value (Purchased May 1990) |
|---|---|---|
| $50 Bond | $100 | $207.36 |
| $100 Bond | $200 | $414.72 |
| $500 Bond | $400 | $1,036.80 |
| $1,000 Bond | $800 | $2,073.60 |
Will bond funds ever recover?
We expect bond yields to decline in line with falling inflation and slower economic growth, but uncertainty about the Federal Reserve's policy moves will likely be a source of volatility. Nonetheless, we are optimistic that fixed income will deliver positive returns in 2024.
Traders are looking ahead to rate cuts as soon as March. Talk about a 180. After a dismal year, the bond market is rallying as investors celebrate the likely end of the Federal Reserve's historic interest rate tightening cycle.
When interest rates rise, existing bonds paying lower interest rates become less attractive, causing their price to drop below their initial par value in the secondary market. (The coupon payments remain unaffected.)
The Series I savings bond has a variable rate that can give the investor the benefit of future interest rate increases. If you're saving for the short term, a CD offers greater flexibility than a savings bond.
The 4.30% composite rate for I bonds issued from May 2023 through October 2023 applies for the first six months after the issue date. The composite rate combines a 0.90% fixed rate of return with the 3.38% annualized rate of inflation as measured by the Consumer Price Index for all Urban Consumers (CPI-U).
- 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)
Bonds may not be a good source of capital appreciation in 2023, but do provide yield. Equity upside may be limited by an uncertain economic landscape, so high yield bonds may offer better return opportunities.
A fourth-quarter rally saved bonds from an unprecedented third straight annual loss in 2023, following the worst-ever decline a year earlier. The late year surge came after Treasuries hit their lowest level since 2007 in October.
Risk tolerance
While both CDs and bonds are generally safe investments, both carry their own risk factors. CDs face inflation risk, while bonds face interest rate risk. Investing in a mixture of both can help hedge your investments. You may see greater returns with high-yield bonds if you're more risk-tolerant.
Credit spreads remain very tight, and the yield you can earn when adjusted for duration favors high-quality intermediate bonds. So, investors are not really being paid to take on credit or interest rate risk.” Others have said that 2024 might be the time to invest toward the longer end of the risk-return spectrum.
Should I invest in bonds in 2024?
In this scenario, yields will remain relatively high, but with bond prices rising in the second half of 2024. DiMaggio wrote, "For bond investors, these conditions are nearly ideal." This rosy outlook doesn't apply only to government bonds. AllianceBernstein projects corporate bonds to perform well also.
The big picture: Yields across credit sectors began 2024 lower than their October 2023 peaks but were still well above their 10-year averages. We see a strong case for credit to outperform government bonds this year, primarily due to higher yields.
Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price.
- SPDR® Portfolio Long Term Treasury ETF.
- Vanguard Extended Duration Trs ETF.
- Schwab Long-Term US Treasury ETF.
- Vanguard Long-Term Treasury ETF.
- US Treasury 10 Year Note ETF.
- PIMCO 25+ Year Zero Coupon US Trs ETF.
- iShares 20+ Year Treasury Bond ETF.
In line with the outlook from other investment providers, the firm is forecasting a 5.7% gain in 2024 for U.S. investment-grade bonds, versus 4.9% last year and 2.3% in 2022. (All figures are nominal.)
