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US Bond Investors Anticipate A 2024 Fed Turn To Continue The Explosive Surge

Federal Reserve rate inflation
Economists expect the Fed's preferred inflation gauge, set to be released on Friday, to decline from 3.8% in May to 3% in June, bringing it close to the central bank's 2% target rate. (PHOTO: ETF Database)

Some investors foresee better times in the U.S. fixed income market next year as bonds emerge from a historic selloff—that is, if the Federal Reserve’s rate reduction materialize as expected.

Inflation Is On Its Peak

After the worst-ever decrease a year earlier, bonds saw an unprecedented third consecutive year loss in 2023 until a fourth-quarter rebound prevented it. The October drop in Treasuries to their lowest level since 2007 was the catalyst for the late-year rally.

Expectations that the Fed is probably done raising rates and will reduce borrowing costs next year helped to fuel those gains. This belief gained traction when policymakers unexpectedly included a 75 basis point lowering in their December economic projections amid signals that inflation was on the rise.

Futures linked to the Fed’s main policy rate show that the market has priced in cuts of about 150 basis points for next year, which is double what policymakers have budgeted for. The yield on the benchmark 10-year Treasury was 3.88% last week, the lowest since July.

A lot of people are also keeping an eye out for the resurgence of the budgetary concerns that propelled yields to their 2023 highs but subsided in the latter half of the year.

Hike In The US Bond Returns


Source: cbs News

“We should expect to see some rate cuts next year, as long as the Fed doesn’t completely get this wrong,” stated Brandon Swensen, a senior portfolio manager at RBC Global Asset Management’s BlueBay Fixed Income team. But “there might be a bumpy path.”

The second-biggest asset management in the world revised its forecast for U.S. bonds returns over the next ten years to 4.8%–5.8% from 1.5%–2.5% prior to the start of the rate-hiking cycle last year.

With more than $300 billion in assets, the Vanguard Total Bond Market Index Fund reported a 5.28% return year to far as of last week, up from a negative 13.16% return in the previous year. As of last week, PIMCO’s flagship $132 billion bond fund, the Income Fund, has returned 8.92% year to year, compared to negative 7.81% in the previous year.

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