Should I invest in fixed income funds now?
Looking ahead: Our positive view on the value of fixed income still holds. We expect interest rates to ultimately settle above the unusually low levels experienced after the 2008 global financial crisis. Investors can capture durable, resilient yields, and if rates decline, additional price appreciation.
In current market circ*mstances, with higher bond yields, fixed income investments have become an attractive asset class again from a risk-return perspective. Apart from the attractive yield, bonds also offer resilience for adverse market developments in risk assets like equities.
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.
Fixed-income investing is a great way to earn consistent investment income and reduce risk. Investments such as bonds, CDs, and money-market funds can help diversify your portfolio and protect your capital when the market fluctuates.
“Although some volatility may continue, we believe interest rates have peaked,” predicts Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research. “We expect lower Treasury yields and positive returns for investors in 2024.”
Because of ongoing uncertainty about the prospects for growth in 2023, high-quality fixed-income assets may prove more stable, attractive investments in the near term compared to more volatile investments like stocks.
Fixed income has outperformed both cash and equities during recessions in the US since 1972. Interest rates tend to begin to decline three months ahead of recessions and reach a cycle low about five months into recessions.
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.
Traditionally, the answer has been that bonds provide diversification and income. They zig when stocks zag, providing income for spending needs. In finance terms, bonds have “low correlation” levels to stocks, and adding them to a portfolio would help to reduce the overall portfolio risk.
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.
Why is fixed income going down?
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.
As the main disadvantage of this type of investment, we can mention that its profitability is the lowest in the financial market. While higher risk may lead to higher profit, many investors choose to go the secured path, even if it means less reward.
Investments that can be appropriate include bank CDs or short-term bond funds. If your investing timeline is longer, and you're willing to take more risk in order to potentially earn higher yields, you might consider longer-term Treasury bonds or investment-grade corporate or municipal bonds.
The top picks for 2024, chosen for their stability, income potential and expert management, include Dodge & Cox Income Fund (DODIX), iShares Core U.S. Aggregate Bond ETF (AGG), Vanguard Total Bond Market ETF (BND), Pimco Long Duration Total Return (PLRIX), and American Funds Bond Fund of America (ABNFX).
Bond prices move in inverse fashion to interest rates, reflecting an important bond investing consideration known as interest rate risk. If bond yields decline, the value of bonds already on the market move higher. If bond yields rise, existing bonds lose value.
Given where we are now (i.e., post-Covid, falling inflation, higher rates, restoration of bonds' diversification benefits), we believe that the case for fixed-income is very strong. Although cash rates are currently attractive, investment-grade credit yields are currently offering outperformance.
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.
- Exchange Traded Funds (ETFs) ETFs have grown to become one of the most popular investments. ...
- Dividend Stocks. Dividend stocks are among the best stocks to buy now. ...
- Short-term Bonds. ...
- Real Estate. ...
- Alternative Assets.
If you own shares of a bond ETF, you might have a sinking feeling seeing the market value of your investment dip as interest rates increase. However, it's worth noting that rising interest rates can't last forever, and bond ETF prices are likely to recover once rates go lower.
On the negative side, energy and infrastructure stocks have been the hardest-hit in recent recessions. Companies in these sectors are acutely sensitive to swings in demand. Financials stocks also can suffer during recessions because of a rising default rate and shrinking net interest margins.
Where is your money safest during a recession?
Cash, large-cap stocks and gold can be good investments during a recession. Stocks that tend to fluctuate with the economy and cryptocurrencies can be unstable during a recession.
"Higher for longer" raises the term premium
The culprit for the market's poor performance is the term premium—the extra yield that investors demand to tie up their money in longer-term bonds versus holding short-term bonds and reinvesting them.
Key Takeaways: Growth stocks may see a robust 2024 on the strength of trends such as AI disruption and decarbonization. Small-cap stocks are trading at attractive valuations as analysts see the possibility of a rebound in 2024. The time could be right for locking in rates on long-term, high-yield bonds.
- High-yield savings accounts.
- Long-term certificates of deposit.
- Long-term corporate bond funds.
- Dividend stock funds.
- Value stock funds.
- Small-cap stock funds.
- REIT funds.
- S&P 500 index funds.
Moving 401(k) assets into bonds could make sense if you're closer to retirement age or you're generally a more conservative investor overall. However, doing so could potentially cost you growth in your portfolio over time.
