It'd be a big mistake not to be snapping up bonds right now, according to Goldman Sachs Asset Management's Ashish Shah.
Shah, who's the asset manager's CIO for public investing, said Friday that he's expecting fixed income to deliver stellar returns in 2024, amid signs the economy is slowing down and inflation is falling toward the Federal Reserve's 2% target.
"What I think we're seeing right now is not just a slowing in the economy, but inflation that is actually coming down, and that sets up a fantastic total return for the bond market," he told CNBC's "Squawk Box", highlighting quality bonds like mid-duration corporates and US Treasurys as particularly appealing.
"Take every opportunity you can when people get scared about what the Fed's doing to build your position," Shah added. "We've hit the mid-cycle, the Fed's hikes have had their impact on inflation, and this coming year is going to be the year of bonds. So don't mess it up."
Shah's "Year of the Bond" prediction echoes what much of Wall Street had been forecasting at the start of 2023, based on the widespread expectation that the economy would slip into a recession at some point this year.
Yields on the benchmark 10-year US Treasury note spiked to a 16-year high of over 5% in late October but have since dropped by around 75 basis points. Bond prices rise when yields fall.
Investors' belief that the Fed is now done raising interest rates has powered the fourth-quarter retreat in yields. Traders are now all-but-certain that the central bank won't tighten again before starting to slash borrowing costs in mid-2024, according to the CME Group's Fedwatch tool. Bonds tend to benefit when rates fall because their fixed yields start to offer better relative returns.
Bonds are primed for a stellar 2024, according to Goldman Sachs Asset Management's Ashish Shah. The asset class has staged a mini-comeback in recent months after October's collapse. "This coming year is going to be the year of bonds," Shah said Friday. "So don't mess it up."
As inflation finally seems to be coming under control, and growth is slowing as the global economy feels the full impact of higher interest rates, 2024 could be a compelling year for bonds.
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.
Long-term bonds have an average maturity of 10 years or longer, making them a better choice when interest rates are falling, as they're expected to do in 2024.
Waiting for the Fed to cut rates before considering longer term bonds isn't our preferred approach. The bond market is forward-looking and long-term Treasury yields typically decline once investors believe that rate cuts are coming.
The table on the right shows that bond prices often recover within 8 to 12 months. Unnerved investors that are selling their bond funds risk missing out when bond returns recover.
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.
Should I only buy bonds when interest rates are high? There are advantages to purchasing bonds after interest rates have risen. Along with generating a larger income stream, such bonds may be subject to less interest rate risk, as there may be a reduced chance of rates moving significantly higher from current levels.
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.)
Following large front-loaded new issue supply, EM IG spreads are now at attractive levels versus U.S. credit, setting up EM debt for outperformance. Our 2024 macroeconomic base case features slowing inflation and growth cushioned by Fed rate cuts.
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).
Mortgage giant Fannie Mae likewise raised its outlook, now expecting 30-year mortgage rates to be at 6.4 percent by the end of 2024, compared to an earlier forecast of 5.8 percent.
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