Bonds, the great ‘comeback’ story of 2024?

After a challenging few years for fixed income investors, including a ‘first-in-45-year’ tandem drop in both bond and equities markets, bonds are well placed for a resurgence in 2024, according to analysts from US investment giant Capital Group.

With inflation concerns finally abating and an end to years of aggressive policy rate tightening in sight, the picture for bonds “has brightened considerably in recent months”, the analysts said.

As the bond market decouples itself from equities, fixed income can now return to its traditional role as a hedge against a more volatile stock market, “offering income and diversification from equity market downturns” said Oliver Edmunds, fixed income portfolio manager at Capital Group.

This resurgent bond market has been recognised by the Capital Group analysts as one of the top five investment trends for 2024.

“With inflation falling faster than expected, the [US] Federal Reserve has indicated it is done raising interest rates — news that triggered a fourth-quarter rally across bond markets. The end of a tightening cycle has historically been a good time to own bonds.”

“What’s more, given that yields have risen significantly across credit sectors – and that any slowdown in the economy could trigger rate cuts – bonds could be the comeback story of 2024.”

‘Stay on the sidelines’ at your peril

Cash, however, is losing its lustre for the Captial Group analysts.

Investors who made the retreat to safe haven cash or cash-equivalent instruments over the last few years may feel ‘reassured’ by the still attractive rates found on money markets, the experts said.

However, these risk- and loss-averse investors may be missing out on considerable gains being, and to be made, in securities markets.

“[Cash] might not be as attractive as you think when you consider the opportunity cost,” the analysts said.

“Investors need look no further than their fourth quarter 2023 statements to see that staying on the sidelines comes with its own risks.

“The S&P 500, a broad measure of US stocks, advanced 11.69% for the three months ended 31 December 2023, and the Bloomberg US Aggregate Index, a broad measure of the US bond market, rose 6.82%.

Mike Gitlin, president and chief executive officer of Capital Group, believes the market is “on the cusp of a major transition where long-term investors can find attractive investment opportunities in stocks and bonds”.

With one of the biggest election years in history – with more than 3.5 billion people set to go to the polls – the analysts remain cautiously optimistic on prospects for long-term investors.

The US election, they note, will be particularly contentious. However, historically, “the party that prevails [whether Democratic or Republican] has had little impact on long-term market returns”.

Investment opportunities also abound in periods of volatility, with gains to be made for patient investors, they said.

“High-quality companies frequently get caught in political crosshairs, which can create a buying opportunity,” said Capital Group’s equity portfolio manager Rob Lovelace.