Stocks are attractive, but these market experts see a generational opportunity in bonds

Super profits and the promise of AI have emerged Investors—and meme-stock speculators-for the stock market in recent years. But it’s a very different story for the bond market.

After keeping interest rates near zero for nearly a decade after the Great Financial Crisis and again during the COVID era, the Federal Reserve began aggressively raising interest rates to fight inflation in March 2019. 2022. That leads to a sharp interest rate hike. painful fixed income bear market due to the inverse relationship between bond prices and yields (which move with the Fed funds rate).

It’s been 46 months since the bond market last hit a record high, and the Bloomberg Aggregate Bond Index is down about 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 invest in bonds.

“The entry point is very, very attractive,” said Anders Persson, fixed income CIO at global asset manager Nuveen. Luck in a recent interview. “I mean, essentially, the yield, as you well know, is the most attractive we’ve seen in over 15 years.”

Take Rick Rieder, global CIO of fixed income and head of the asset allocation team at Black stonesnote, the Fed’s rate hike essentially “put fixed money back into fixed income.”

“You can create a portfolio that yields close to 7% with fairly moderate volatility. It’s been decades since you’ve been able to do that,” he said. Luck last month.

Once investors lock in those rates, bond prices could also rise when the Fed starts cutting interest rates later this year or next. According to these bond market experts, this is a golden opportunity for the combination of stable income and rising prices.

Why bond investors are optimistic

Persson and Rieder – who are collectively responsible for about $2.8 trillion in assets, about 23 times the value of each NBA team combined – are bullish on bonds even as co-founders of PIMCO and “bond king” Bill Gross has warned that without cutting interest rates to boost prices, bond market investors will just “clip coupons,” or collect interest from the profits.

Those coupons are quite attractive in many sub-areas.

“When you’re looking at 6% or so for broader fixed income, 7% for preferreds, 8% for high yield and closer to 10% for senior loans, those entry levels are really very attractive from a historical basis,” Nuveen’s Persson emphasizes.

He added that, historically, there has been a high correlation between fixed-income investors’ future total returns and how high the yields were when they started investing. To that point, NYU Stern’s annual profit chart shows that bonds tend to perform better after peaks in Fed rate hike cycles (i.e. when yields are high).

For example, corporate bonds returned more than 15% to investors for five consecutive years after then-Fed Chairman Paul Volcker famously raised interest rates to a peak of 19% in 2019. 1981 to combat hyperinflation. And they also outperformed stocks three out of five of those years.

Rieder also said bonds have serious upside potential as interest rate cuts will likely come after final data confirms the Fed has beaten inflation.

Persson, who forecasts interest rate cuts once or twice this year, said that if the economy starts to crack, the Fed will have to cut aggressively. “And then you get the total return or capital appreciation of that investment,” he said. Luckadding that “in most cases, you see pretty good profit potential here over the next 12 months.”

There is also evidence that bonds could still outperform even if interest rates stay at current levels, with the Fed maintaining its current wait-and-see mode for longer than expected. in one Note for customers Last summer, LPL Financial chief fixed income strategist Lawrence Gillum noted that the Bloomberg Aggregate Bond Index had performed well during periods when the Fed had historically paused interest 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 interest rates. Furthermore, all periods generated positive returns over the 6-month, 1-year, and 3-year periods,” he wrote.

For Rieder, that’s why the current environment, where the Fed is stuck in a holding pattern, is a Goldilocks zone for fixed-income investors. “You have this incredible gift, because inflation is at its current level, we’re going to be buying credit assets cheaper than they should be,” he explained.

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