Drew O’Neil discusses fixed income market conditions and offers insight for bond investors.

Welcome to 2024! As we wade into the new year, you will undoubtedly read and hear a wide range of forecasts predicting what financial markets are going to bring us over the next 12 months. While taking in a range of predictions and forecasts is informative and can provide valuable market color and data, keep in mind that these are all just guesses about the future. Putting too much weight on strategies that require correctly timing the market could be detrimental should forecasts turn out to be incorrect. Yes, all of the forecasts you come across will (hopefully) be well researched, backed by sound and logical thinking, and will be rational. This does not mean that they are going to come to fruition. Come December 31st, for every money manager out there that was correct with their predictions there will likely be multiples more that were not even close (What percent of active managers actually outperform the market?).

Just how difficult is it to accurately predict the future on a consistent basis? The chart below shines some light on the question by highlighting the prediction for the 10-year Treasury yield at the beginning of each year (red lines) based on the Survey of Professional Forecasters which is conducted by the Philadelphia Federal Reserve. The blue line shows actual 10-year Treasury yields. Notice how often these predictions were correct. Predicting the future is hard. Unforeseen events happen on a regular basis and often determine the direction of the financial markets.

 10 Year Treasury Forecasts Vs Actual

What does this mean for fixed income investors? The beautiful thing about owning individual bonds is that returns are not dependent on what the market does in the future. For buy-and-hold investors, once a bond is purchased, its yield, cash flow, and maturity value are locked in and are unaffected by changes in interest rates*. If you buy a 5-year bond yielding 5% today, it doesn’t matter what interest rates do over the next 5 years. Currently, although yields are off their recent highs of a few months ago, they still remain at some of the most attractive levels in over a decade. In the face of an endless stream of predictions and forecasts, putting money to work in an investment vehicle that requires neither is something to consider as we wade into the unknowns of 2024.

*Barring a default