What is the outlook for fixed income in 2024?
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.
Despite Treasuries' recent rally, yields remain very compelling, with the US 10-year Treasury now yielding 3.9%. For bond investors, these conditions are nearly ideal. After all, most of a bond's return over time comes from its yield. And falling yields—which we expect in the latter half of 2024—boost bond prices.
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).
Economic growth is projected to slow in 2024 amid increased unemployment and lower inflation. CBO expects the Federal Reserve to respond by reducing interest rates, starting in the middle of the year. In CBO's projections, economic growth rebounds in 2025 and then moderates in later years.
Our base case outlook is for a low-growth or mild recession in 2024 stemming from the persistent drag of tight monetary policy during the last two years and the potential for fiscal policy to turn from a tailwind to a headwind.
Final thoughts. Fixed income valuations, and a different inflation profile to the past few years, should make 2024 a good year for bonds.
After its December 2023 session, the Fed forecasted it would make three quarter-point cuts by the end of 2024 to lower the benchmark rate to 4.6%. Prices have started to come down, but the group has signaled it wants to see more positive data before pulling the trigger.
- Certificates of deposit. With interest rates in flux, you can lock in a higher yield for 2024 with a certificate of deposit, or CD, Tumin said. ...
- Penalty-free certificates of deposit. ...
- Treasury bills. ...
- Money market mutual funds.
- Health care.
- Real estate.
- Materials.
- Energy.
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.
Will market bounce back in 2024?
Wall Street analysts are expecting earnings to rebound in the first half of 2024, projecting a 4.6% increase in S&P 500 earnings in the first quarter and another 9.4% growth in the second quarter.
A slowdown — but no recession. That's the broad consensus for the economy among experts as we head into 2024. After a post-pandemic period that saw growth surpass most forecasts — but also spurred breakneck inflation — Americans should now expect a period of reduced business activity.
"Some traders predict a flat or down market in the first half of 2024 due to high inflation, recession fears and rate hikes from the Fed. However, others foresee a bull market continuing, citing potential Fed rate cuts, earnings growth and historical trends around election years."
| Name | Ticker | Yield |
|---|---|---|
| 10-Year Treasury Note | (ICE:^TNX) | 4.2% |
| I Savings Bonds | N/A | 5.3% |
| iShares TIPS Bond ETF | (NYSEMKT:TIP) | 5.7% |
| Nuveen High-Yield Municipal Bond Fund | (NASDAQ:NHRMX) | 5.0% |
| Ticker | Fund | 1-Mo Return |
|---|---|---|
| VCIT | Vanguard Intermediate-Term Corporate Bond ETF | 5.95% |
| IEF | iShares 7-10 Year Treasury Bond ETF | 4.55% |
| BND | Vanguard Total Bond Market ETF | 4.05% |
| AGG | iShares Core US Aggregate Bond ETF | 4.59% |
Investor takeaway:
While slower economic growth does pose a risk to the market, we expect their prices to hold up better than the prices of high-yield bonds. Investors looking to earn higher yields without taking too much additional risk should consider investment-grade corporate bonds.
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.
Looking at the asset class's historical performance leads us to believe that high yield is poised to produce a positive return in 2024, albeit not as robust as that experienced in 2023. We believe that the economy is not rolling over and that a recession is likely to be at least six months away.
The National Association of Realtors expects mortgage rates will average 6.8% in the first quarter of 2024, dropping to 6.6% in the second quarter, according to its latest Quarterly U.S. Economic Forecast. The trade association predicts that rates will continue to fall to 6.1% by the end of the year.
Mortgage Bankers Association (MBA).
MBA's baseline forecast is for mortgage rates to end 2024 at 6.1% and reach 5.5% at the end of 2025 as Treasury rates decline and the spread narrows.
How high will interest rates go in 2025?
Mortgage rates are going to stay above 6% through 2025, according to estimates from Goldman Sachs. Goldman said the decline in mortgage rates should offer marginal improvements in housing affordability. The average 30-year mortgage rate fell to 6.62% last week after hitting a cycle-high of 7.8%.
Earning low interest on cash
"One of the top money traps individuals may face in 2024 is leaning too heavily into cash at the expense of higher potential returns in the markets," says Jill Fopiano, a Certified Financial Planner (CFP) and president and CEO at O'Brien Wealth Partners.
Funds Transfer and Travel Rule Requirements
Treasury regulation 31 CFR Section 103.33 prescribes information that must be obtained for funds transfers in the amount of $3,000 or more.
- High-yield savings accounts. Overview: A high-yield online savings account pays you interest on your cash balance. ...
- Long-term certificates of deposit. ...
- Long-term corporate bond funds. ...
- Dividend stock funds. ...
- Value stock funds. ...
- Small-cap stock funds. ...
- REIT index funds. ...
- S&P 500 index funds.
“Looking into 2024, economic conditions are expected to deteriorate modestly, though real GDP growth and the pace of job gains are expected to remain positive, and inflation is expected to decline to around 2.5%” is how Kevin Kliesen, a business economist and research officer at the Federal Reserve Bank of St.
