Higher returns and the promise of AI have drawn investors – and meme stock speculators – to the stock markets in recent years. But for the bond market it was a completely different story.
After holding rates at zero for nearly a decade after the Great Financial Crisis and again during the COVID era, the Federal Reserve began aggressively raising rates in March 2022 to combat inflation. That led to a painful bear market for fixed income securities due to the reverse trend. the relationship between bond prices and yields (which move with the Fed’s interest rate).
It’s now been 46 months since the bond market last hit an all-time high, and the Bloomberg Aggregate Bond Index is down about 50% from its July 2020 peak. But with bonds finally offering solid returns, some of the best fixed income The world’s investors believe now is the best time to get into bonds in a generation.
“The entry point is just very, very attractive,” says Anders Persson, CIO of fixed income at global asset manager Nuveen. Fortune in a recent interview. “I mean, in fact, the returns, as you well know, are the most attractive we’ve seen in over 15 years.”
As Rick Rieder, global CIO of fixed income and head of the asset allocation team at BlackRock, noted, the Fed’s rate hikes have essentially “turned fixed assets back into fixed income.”
“You can create a portfolio with a return of almost 7% and fairly moderate volatility. It’s been decades since you’ve been able to do that,” he said Fortune last month.
After investors lock in these yields, bond prices could also rise if the Fed starts cutting rates later this year or next year. According to these bond market gurus, it is a golden opportunity for a mix of stable income and price appreciation.
Why bond investors are bullish
Persson and Rieder – who are collectively responsible for roughly $2.8 trillion in assets, or about 23 times more than the value of each NBA team combined – are bullish on bonds, even like PIMCO co-founder and “bond king” Bill Gross has warned that without rate cuts to boost prices, bond market investors will simply cut coupons or collect interest income from interest.
Those coupons are pretty juicy in many subsectors.
“If you look at around 6% for broader fixed income, 7% for preferred loans, 8% for high-yield loans and almost 10% for senior loans, those entry levels are really very attractive historically,” says Nuveen. Persson emphasized.
He added that historically there has been a high correlation between future total returns for fixed income investors and how high the returns were when they started investing. To that point, NYU Stern’s annual yield chart shows that bonds tend to perform better after spikes in Fed rate hikes (i.e., when rates are high).
Corporate bonds, for example, offered investors returns of more than 15% for five years after then-Fed Chairman Paul Volcker raised interest rates to a peak of 19% in 1981 to combat runaway inflation. And they also outperformed stocks three out of five years.
Rieder also said there is serious price appreciation potential in bonds, as rate cuts are likely on the way once data finally confirms the Fed has beaten inflation.
Persson, who predicts one or two rate cuts this year, said if the economy starts to crack, the Fed will have to cut aggressively. “And then you get the total return aspect, or capital growth, of that investment,” he said Fortuneand adds that “you see pretty healthy return potential in most scenarios over the next twelve months.”
There are also indications that bonds can still outperform even if interest rates remain at their current levels, with the Fed maintaining its current wait-and-see stance for longer than expected. In a note to clients last summer, Lawrence Gillum, LPL Financial’s chief fixed-income strategist, noted that the Bloomberg Aggregate Bond Index has performed well during periods when the Fed has historically halted its rate hikes.
“Since 1984, core bonds have been able to generate average six-month and one-year returns of 8% and 13%, respectively, after the Fed stopped raising rates. Furthermore, all periods generated positive returns over the six-month, one-year and three-year horizons,” he wrote.
For Rieder, that’s one reason why the current environment, with the Fed stuck in a holding pattern, is a goldilocks for fixed income investors. “You have an incredible gift, because inflation stays where it is, we can buy credit assets cheaper than we should,” he explained.
This story originally appeared on Fortune.com
