Bonds have moved to the background, where they should be. As fixed income, they don't even try to compete with the leading stocks of the investment world.
The first half of the year was mediocre for bonds, but it was considered a huge improvement. Over the past three years, bonds often attracted attention for the worst reasons.
However, now with the annual inflation rate it's fallingThe fundamental outlook for bonds for the rest of 2024 and beyond is more positive than it has been in some time. If you have cash in a money market fund that's earning 5 percent or more in interest annually, you should start planning ahead because those attractive short-term interest rates could soon begin to fall — while bond returns will yield a huge bonus.
But due to increasing uncertainty about the country's economy Political future There have been signs since the Trump-Biden debate that the bond market will have a tough time going forward. Here are some important factors to consider and some ways to handle them.
Bad times
First, some important things about investing.
Stocks are risky. I've always known that, and I'm willing to take the occasional loss from them so I can get the best returns over the long term. But bonds? They're considered safe—a balm when the stock market hurts.
It hasn't been great the last several years. The market has been so bad that sometimes I wonder if there's any benefit in owning bonds. Just look at the numbers.
From the start of 2022 until October of that year, as inflation surged and interest rates rose, core bond funds that mirror the main investment-grade benchmark — the Bloomberg Aggregate Bond Index — suffered heavy losses. The index fell more than 15 percent, including interest and dividends, in that period, and funds that track it, such as the Vanguard Total Bond Market Index Fund and the iShares Core U.S. Aggregate Bond ETF, also fell.
At the same time, the S&P 500 declined about 18 percent, including dividends. Bonds did not stabilize portfolio returns during a stock market decline. They made matters worse.
Bond returns have improved since then, but not by much. In the first half of this year, the core bond index was still slightly down, and was 9 per cent in the red from the start of 2022 to July 3.
To be fair, in limited cases, even in these tough years, bonds have been great investments. Since you don't lose money if you hold a high-quality bond until it matures, individual bonds have proven good for limited periods and purposes: such as storing money in a safe way until you're ready to buy a home or enroll a child in college. Solid bonds — Treasuries, investment-grade corporate bonds or high-quality municipal bonds — have also been useful for people who need to earn secure income for retirement.
But the purpose of bonds and bond funds is much broader than that, as they are a permanent part of a diversified portfolio, and from that point of view they have been disappointing.
What has changed?
History shows that what we've just experienced is rare. This ordeal is nearly over, with one big exception: the potential market turmoil stemming from the presidential race.
Let's start with the main bond market issues
Consider how well bonds have performed over the long term. From Jan. 30, 1976, through June, the Bloomberg Aggregate Bond Index gained 6.5 percent annually. From 1984 to 2021, bond market returns were positive nearly every year.
Interest rates and inflation are important for bonds, and for people buying bonds, these have improved significantly.
This can be confusing. Higher yields provide bondholders with more income. The problem for investors comes when rates or yields are rising because bond prices then fall. This is why bondholders and bond funds have suffered losses in recent years.
During the financial crisis of 2008-9, short-term rates controlled by the Federal Reserve fell to almost zero and long-term bond rates, which are driven by the market, also fell. Those falling rates led to huge gains in bonds at the time — but also to the devastation of the last few years, when inflation and interest rates soared.
We now live in a much more favorable environment for both inflation and bond yields. While inflation has not been conquered, it has been contained.
Plus, interest yields are already quite high. The 10-year Treasury note hit an all-time high of nearly 5 percent last October, and the consensus market view is that it’s unlikely to touch that level again soon. In the current trading range, around 4 to 4.5 percent, “the 10-year Treasury is a good value,” said Jeff McDonald, who leads fixed-income strategy at Fiduciary Trust International, a subsidiary of asset management company Franklin-Templeton.
He said it is likely that the yields on many taxable and tax-exempt bonds will decline after a year, which will lead to an increase in the price of the bonds in addition to the income generated by the bonds.
Also, if you've parked your cash in a money market fund, where yields of more than 5 percent are common, you might want to consider moving some money into bonds or bond funds. The Fed's own projections suggest it will begin cutting short-term rates by the end of the year. Then money-market fund yields will begin falling sharply, and it may be too late to lock in attractive bond yields.
Gennady Goldberg, head of U.S. rates strategy for TD Securities, said that if the economy begins to stall, interest rates “could come down further, more quickly than the market expects.” “It makes sense to move before that happens.”
But the choice
Share Market The government has barely reacted to the questions looming over the presidential race. But the bond market has.
Long-term bond rates rose immediately after the debate, which was a negative reaction. Apparent increase in the electoral fray Possibilities Former President Donald J. Trump and Republican candidates for Congress and Deterioration Outlook For the Democrats.
These higher rates probably reflect concern that Mr. Trump could gain control of Congress as well as the presidency. He could then pursue policies such as more and broader tariffs, as well as tax cuts that could significantly increase the budget deficit. All of this could contribute to higher inflation and interest rates.
Bond yields have fallen slightly and the political situation is volatile. It is also not clear now whether President Biden will be the Democratic nominee. For now, it would be wise to hold off on Proceed with caution.
Some bonds will become more vulnerable if rates change suddenly. Remember that when rates rise, the prices of long-term bonds fall more quickly than those of shorter-term securities. Right now, making big bets on long-term bonds would be risky. And high-yield bonds, also known as junk bonds, are poor choices when the bond market gets tough.
The Bloomberg US Aggregate Bond Index tracks the conservative part of the market. Its duration – its sensitivity to interest rates – is about six years, and it includes only government and high-quality investment-grade bonds. I would think twice about buying bonds or bond funds with riskier values than that right now.
In fact, if the political situation becomes even more difficult, keeping cash in a money market fund or savings account or some other safe place may be a wise temporary move.
But bonds, especially Treasuries, can be a haven in a real crisis. That's a lasting reason to own them. Yet bonds are best when they're quietly doing their main, unglamorous job: generating income and smoothing out the bumpy ride of a stock portfolio. I hope the political world lets bonds get super boring.