Should you buy bonds 2024?
Vanguard's active fixed income team believes emerging markets (EM) bonds could outperform much of the rest of the fixed income market in 2024 because of the likelihood of declining global interest rates, the current yield premium over U.S. investment-grade bonds, and a longer duration profile than U.S. high yield.
Credit spreads remain very tight, and the yield you can earn when adjusted for duration favors high-quality intermediate bonds. So, investors are not really being paid to take on credit or interest rate risk.” Others have said that 2024 might be the time to invest toward the longer end of the risk-return spectrum.
I bonds are a low-risk investment option and a great way to diversify your investment portfolio and hedge against inflation. The current I bond rate is 5.27% for bonds issued between November 1, 2023, and April 30, 2024.
Waiting for the Fed to cut rates before considering longer term bonds isn't our preferred approach. The bond market is forward-looking and long-term Treasury yields typically decline once investors believe that rate cuts are coming.
In a recession, investors often turn to bonds, particularly government bonds, as safer investments. The shift from stocks to bonds can increase bond prices, reduce portfolio volatility, and provide a predictable income. However, drawbacks include lower yield potential, default risks, and interest rate risks.
The valuations of small-capitalization stocks in particular seem to already price in a recession. As for fixed income, we expect a strong bounce-back year to play out over the course of 2024. When bond yields are high, the income earned is often enough to offset most price fluctuations.
At its second gathering of 2024, held March 19 and 20, the Federal Reserve once again declined to adjust interest rates. It similarly held rates steady after its inaugural 2024 session in January. The federal funds target rate has remained at 5.25% to 5.5% since summer 2023, the highest it's been in over 20 years.
That means the mortgage rates will likely be in the 6% to 7% range for most of the year.” Mortgage Bankers Association (MBA). MBA's baseline forecast is for the 30-year fixed-rate mortgage to end 2024 at 6.1% and reach 5.5% at the end of 2025 as Treasury rates decline and the spread narrows.
If bond yields rise, existing bonds lose value. The change in bond values only relates to a bond's price on the open market, meaning if the bond is sold before maturity, the seller will obtain a higher or lower price for the bond compared to its face value, depending on current interest rates.
When Will Interest Rates Go Down? We expect the Fed to start cutting rates beginning with the June 2024 meeting. The Fed will pivot to monetary easing as inflation falls back to its 2% target and the need to shore up economic growth becomes a top concern.
Can you lose money on bonds if held to maturity?
Holding bonds vs. trading bonds
However, you can also buy and sell bonds on the secondary market. After bonds are initially issued, their worth will fluctuate like a stock's would. If you're holding the bond to maturity, the fluctuations won't matter—your interest payments and face value won't change.
Investing in bonds when interest rates have peaked can yield higher returns. However, rising interest rates reward bond investors who reinvest their principal over time. It's hard to time the bond market. If your goal for investing in bonds is to reduce portfolio risk and volatility, it's best not to wait.
Key Takeaways
Bond rates are lower over time than the general return of the stock market. Individual stocks may outperform bonds by a significant margin, but they are also at a much higher risk of loss. Bonds will always be less volatile on average than stocks because more is known and certain about their income flow.
So, if the bond market declines or crashes, your investment account will likely feel it in some way. This can be especially concerning for investors with portfolios heavily weighted toward bonds, such as those in or near retirement.
After weighing your timeline, tolerance to risk and goals, you'll likely know whether CDs or bonds are right for you. CDs are usually best for investors looking for a safe, shorter-term investment. Bonds are typically longer, higher-risk investments that deliver greater returns and a predictable income.
Riskier assets like stocks and high-yield bonds tend to lose value in a recession, while gold and U.S. Treasuries appreciate.
- iShares Core U.S. Aggregate Bond ETF (AGG)
- Vanguard Total World Bond ETF (BNDW)
- Vanguard Core-Plus Bond ETF (VPLS)
- DoubleLine Commercial Real Estate ETF (DCRE)
- Global X 1-3 Month T-Bill ETF (CLIP)
- SPDR Portfolio Corporate Bond ETF (SPBO)
- JPMorgan Ultra-Short Income ETF (JPST)
- iShares 7-10 Year Treasury Bond ETF (IEF)
Looking at the asset class's historical performance leads us to believe that high yield is poised to produce a positive return in 2024, albeit not as robust as that experienced in 2023. We believe that the economy is not rolling over and that a recession is likely to be at least six months away.
Traditionally, the answer has been that bonds provide diversification and income. They zig when stocks zag, providing income for spending needs. In finance terms, bonds have “low correlation” levels to stocks, and adding them to a portfolio would help to reduce the overall portfolio risk.
Around 6% or below by Q1 2025: "Rates hit 8% towards the end of last year, and right now we are seeing rates closer to 6.875%," says Haymore. "By the first quarter of 2025, mortgage rates could potentially fall below the 6% threshold, or maybe even lower."
What will interest be in 2025?
The average 30-year fixed mortgage rate as of Thursday was 6.99%. By the final quarter of 2025, Fannie Mae expects that to slide to 6.0%. Meanwhile, Wells Fargo's model expects 5.8%, and the Mortgage Bankers Association estimates 5.5%. ResiClub takes all forecasts with a grain of salt.
Importantly, the SEP projects that the Federal Funds rate will fall to 4.6% in 2024, 3.9% in 2025, and 3.1% in 2026. This implies three 25 basis point rate cuts in 2024.
Interest rate changes are the primary culprit when bond exchange-traded funds (ETFs) lose value. As interest rates rise, the prices of existing bonds fall, which impacts the value of the ETFs holding these assets.
Inflation is a bond's worst enemy. Inflation erodes the purchasing power of a bond's future cash flows. Typically, bonds are fixed-rate investments. If inflation is increasing (or rising prices), the return on a bond is reduced in real terms, meaning adjusted for inflation.
No, I Bonds can't lose value. The interest rate cannot go below zero and the redemption value can't decline.
