For Bond Investors, Delayed Rate Cuts Demand a Different Playbook

[progree]

1. Here's some giddy bubbly bond happy talk - "a generational opportunity in bonds"

Last edited Mon Jun 17, 2024, 12:27 PM - Edit history (1)

https://www.msn.com/en-us/money/markets/stocks-are-sexy-but-these-market-gurus-see-a-generational-opportunity-in-bonds/ar-BB1ojlJM

Stocks are sexy, but these market gurus see a generational opportunity in bonds, By Will David, Fortune, 6/17/24

It’s now been 46 months since the bond market last reached a record high, and the Bloomberg Aggregate Bond Index is down roughly 50% from that July 2020 peak. But with bonds finally offering solid yields, some of the world’s top fixed-income investors believe this is the best time in a generation to get into bonds.

The price is down 50%, but with interest, the total return is not down that much. Still its down double digits.

I took a look a couple months ago at the S&P 500 compared to one of my intermediate term bond investments, which is probably representative of most of what I have in the fixed income area, and this is what I found:

The purchasing power of S&P 500 (as represented by VFIAX) is up 12.90% while that of VCOBX bond fund is down 21.78% in the 3 years to 4/9/24 . Those are total returns, including reinvested dividends and interest, and then adjusted for inflation.

https://www.morningstar.com/funds/xnas/vfiax/chart
https://www.morningstar.com/funds/xnas/vcobx/chart
CPI: https://data.bls.gov/timeseries/CUSR0000SA0

Back to the article:

“The entry point is just very, very attractive,” Anders Persson, CIO of fixed income at the global asset manager Nuveen, told Fortune in a recent interview. “I mean, basically, yields, as you know well, are the most attractive that we've seen in 15 plus years.”

After investors lock in those yields, bond prices could also rally when the Fed starts cutting rates later this year or next. It's a golden opportunity for a mix of steady income and price appreciation, according to these bond market gurus.

Persson, who is forecasting one or two rate cuts this year, said that if the economy starts to crack, the Fed will have to cut aggressively. “And then you get the total return aspect, or the capital appreciation side, of that investment,” he told Fortune, adding that “in most scenarios, you're seeing a pretty healthy return potential here over the next 12 months.”

There is also evidence that bonds could still outperform even if interest rates stay where they are, with the Fed maintaining its current wait-and-see mode for longer than expected. In a note to clients last summer, LPL Financial’s chief fixed income strategist, Lawrence Gillum, noted that the Bloomberg Aggregate Bond Index has performed well during periods when the Fed has paused its rate hikes historically.

Anyway, the upshot is that in years of increasing inflation, existing bonds and bond funds go down because investors can find newer higher yielding bonds. In years when inflation is falling, the opposite occurs. Unfortunately I've not seen much of the latter, even though inflation has fallen from 9% or so year-over-year in mid-2022, to 3.2% for the CPI. My bond funds surged by more than 10% or so in the 3 months from a low point in October until February or so when the awful January inflation report came in, and then my bond funds fell most of the way back.

Anyhow I think inflation is cooling again and expect total returns will be well above the current yields.
Aside: here are the latest inflation graphs of the CPI, PCE, and PPI, both regular and core variations:
https://www.democraticunderground.com/10143256073#post2

I'm an old guy and I just cannot, with maybe 10 years to live, have all my money in stocks, despite their obviously superior return over the long run:



Over the past 20 years, it has grown 6.25 fold, an average annual increase of 9.6%/year

Over the past 50 years, it has grown 193 fold, an average annual increase of 11.1%/year

and so on

I am repeating the above link below to be in clickable scrapable text form:
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/histretSP.html

It also has columns for bonds and Tbills. That page is cited in the article too.

I'm a 60:40 equity to fixed income investor, a ratio which is actually higher equity-wise than is recommended for people my age, from what I've seen.

Thanks much for the topic and articles