The Fixed Income opportunity for 2024


  • In the same way that a swimmer can make the biggest splash by jumping off of a higher diving board, so too fixed income asset returns can appear prospectively most attractive after a prolonged back up in rates. We think the current environment presents fixed income investors with a profoundly compelling opportunity.
  • Indeed, as we reach the end of this hiking cycle, we think the opportunities embedded in bond market dynamics, and the economic backdrop, are truly historic for investors.
  • In brief, we anticipate that the yield curve is likely to eventually steepen, with a rally led by the front-end and belly, and the back end of the curve remaining more range bound.
  • Therefore, we think it makes sense to utilize high-quality, front-end, assets as a ballast for portfolios, and we are increasingly comfortable taking on intermediate duration risk (in the belly of the curve) and credit risk, in order to participate in upside as well.
  • In this commentary, we look at the economic backdrop, which we believe strongly argues for a period of more stable rates, followed by lower rates later in 2024. Then, we will examine some of the technical factors that we believe can be supportive to the bond markets, even in the face of worrisome government bond issuance.

You can only make a big splash off of a high diving board

It is a well-known axiom that while financial markets are clearly related to the economy, they are not equivalent things. That proposition could be seen amply well from 2021 to 2023, when the economy displayed remarkable resilience to the most rapid policy rate hiking cycle undertaken by the Federal Reserve in decades, while the bond markets foundered on the back of high inflation and rapid rate hikes. Indeed, 2022 was the worst year on record for the return performance of the 10-Year U.S. Treasury bond, with 2021 and 2023 coming in close to the worst annual result as well. Since 1900, there has been only one other time that witnessed three consecutive years of negative performance in bond markets (the late-1950s), but that instance was not close to as bad as the present one. Further, the magnitude and pervasiveness of this bond market rout is truly astounding, as it has dramatically impacted the most heavily owned and traded segments of the fixed income markets (see Figure 1). Still, it is also well known that a swimmer can make the biggest splash (in positive return generation) off of a high diving board (after witnessing a dramatic back up in rates), so we think the current environment presents fixed income investors with a profoundly compelling opportunity going forward.

Fixed income performance has suffered greatly in the wake of hiking cycle