Ready, Set, Lock in Rates

Senior Investment Strategist Tracey Manzi shares why the journey to lower interest rates isn't likely to proceed in a straight line.

Key takeaways:

  • Stronger-than-expected growth, concerns about the U.S. government's fiscal outlook and the Federal Reserve's (Fed's) pledge to keep interest rates higher for longer drove yields to levels not seen in decades.
  • Bonds now offer an attractive source of income, reasonable yield cushion to offset adverse movements in interest rates or spreads, potential capital appreciation and diversification from equities.
  • Bonds have historically performed well leading into an easing cycle.

The bond markets had what proved to be another challenging year in 2023. Stronger-than-expected growth, concerns about the U.S. government’s fiscal outlook and the Federal Reserve's (Fed’s) pledge to keep interest rates higher for longer drove yields (particularly longer-dated maturities) to levels not seen in decades. After the 10-year Treasury yield climbed above the psychologically important 5.0% level in October 2023, yields headed sharply lower in the final months of the year. While interest rates are well off their recent peaks, yields still stand near their highest levels in nearly 15 years. And with a Fed easing cycle coming into view in 2024, we think yields will trend lower in the months ahead. Although, the journey to lower interest rates is unlikely to proceed in a straight line.

Bonds have historically delivered strong, positive returns when Fed policy is transitioning into an easing cycle. This should be welcome news for fixed income investors who have endured significant volatility and two back to back years of losses. But, as challenging as the last few years have been, there is a silver lining for investors – and that is, the great rate reset has restored yields to more normal levels. And, with yields now at their highest levels in decades, investors can once again reap the benefits of owning bonds.