Stocks are attractive, but these market executives see an opportunity to generate in bonds
The highly charged benefits and promise of AI have drawn investors—and meme-stock speculators—to the stock market in recent years. But it has been a very different story in the bond market.
After keeping interest rates near zero for nearly a decade after the Great Financial Crisis and again during the COVID-19 era, the Federal Reserve began aggressive rate hikes to fight inflation in March 2022. of the Fed).
It’s now been 46 months since the bond market hit a record high, and the Bloomberg Aggregate Bond Index is down nearly 50% from that peak in July 2020. But with bonds finally offering strong yields, some of the world’s low-income investors believe this is the best time yet. in the generation of entry into bonds.
“The entry point is very attractive,” Anders Persson, CIO of fixed income at global asset manager Nuveen, told. Good luck in a recent interview. “I mean, actually, the benefits, as you well know, are the most attractive that we’ve seen in 15-plus years.”
As Rick Rieder, global CIO of fixed income and head of the asset allocation team at BlackRock, notes, the Fed’s rate hikes have essentially “put fixed income back into fixed income.”
“You can build a portfolio with a yield of around 7% with very moderate volatility. “You haven’t been able to do that for decades,” he said Good luck last month.
After investors lock in those yields, bond prices could rally again when the Fed starts cutting rates later this year or next. It’s a good opportunity for a combination of fixed income and price appreciation, according to these bond market executives.
Why bond investors are bullish
Persson and Rieder—who are jointly responsible for assets worth $2.8 trillion, or about 23 times the value of the entire NBA team combined—have the power of bonds, as PIMCO founder and “bond king” Bill Gross has warned. without rate cuts to boost prices, bond market investors will be “cutting coupons,” or collecting interest income from yields.
Those coupons are juicy in many small categories.
“When you look at 6% or so in high fixed income, 7% in preferreds, 8% in high yield, and about 10% in high loans, those entry levels look really attractive historically,” Nuveen’s. .
He added that, historically, there is a high correlation between the future total return of low-income investors and how high the yield was when they first invested. To that point, NYU Stern’s annual return chart shows that bonds tend to perform best after the peaks of Fed hiking cycles (ie when yields are high).
Corporate bonds, for example, provided 15%-plus returns to investors for five consecutive years after then-Fed Chairman Paul Volcker raised interest rates to 19% in 1981 to fight inflation. And they outperformed stocks three out of five of those years.
Rieder also said there is more leverage in bond yields because rate cuts may be on the way if the data finally confirms that the Fed has beaten inflation.
Persson, who predicts one or two rate cuts this year, said that if the economy starts to deteriorate, the Fed will have to cut more. “Then you get the total return, or capital appreciation side, of that investment,” he said Good luckadding that “in most cases, you see good potential to come back here in the next 12 months.”
There is also evidence that bonds can 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 letter to clients last summer, LPL Financial’s chief strategist, Lawrence Gillum, noted that the Bloomberg Aggregate Bond Index has performed well during periods when the Fed has historically paused its rate hikes.
“Since 1984, core bonds have been able to generate 6-month and 1-year returns of 8% and 13%, respectively, after the Fed stopped raising rates. In addition, all periods had positive returns over the 6-month, 1-year and 3-year periods,” he wrote.
For Rieder, that’s one reason why the current environment, where the Fed is stuck in a holding pattern, is a Goldilocks environment for fixed-income investors. “You have this very good gift, because inflation is where you are, we are going to buy debt goods cheaper than they should be,” he explained.
Source link
