Investing in Bonds in 2024
January 31, 2024
In the battle against inflation, the Federal Reserve's assertive decision to significantly raise interest rates in 2023 led to the devaluation of Equities and Bonds, triggering regional bank failures along the way. Despite the decrease in inflation from 7.04% to 3.35%, the reasons behind this decline—whether influenced by the aggressive rate hike, the transitory nature of inflation, or a combination of both—remain uncertain. Nevertheless, the resilience of the US economy is evident, with the latest quarterly GDP registering a positive 3.1% and the Unemployment Rate standing strong at 3.5%.
Despite the positive economic indicators, there is confusion in the market as bond investors are pricing in numerous rate cuts for 2024. If the Federal Reserve's primary focus is to curb inflation to 2%, a further increase in interest rates may be warranted given the heightened inflation compared to historical averages. However, the decision by the Fed to halt rate hikes suggests a move toward a more normal rates environment, distancing itself from the abnormal 0% interest rate scenario aimed at jumpstarting the economy.
The perplexing inversion of the Treasury Yield Curve raises concerns, providing a key reason to avoid long-term bond investments. With negative returns over the last 2 to 3 years, depending on the bond index, there is growing pressure from capital markets (mainly bond investors) urging the Fed to lower rates. Some Congressmen have joined this call for rate cuts, even though the only justifiable reasons for such actions are to combat a recession or slow down an overheating economy—conditions that do not currently apply.
In the absence of a recession, which typically manifests with two consecutive quarters of negative growth, and considering the positive growth posted in the fourth quarter of 2023, the determination of a recession's presence will only be possible in July 2024. As we emerge from the pandemic, 2024 is envisioned as a year of normalization in the market. While capital markets may express opinions based on their agendas, the Fed, as an independent entity, should adhere to its primary mandates of ensuring price stability and full employment, both of which are nearing accomplishment.
To achieve a normalized Yield Curve in the future, either short-term rates must fall below long-term rates or long-term rates must rise above short-term rates. With no recession on the horizon, the expectation is that the latter scenario will unfold. Consequently, bond exposure is advised within 6-month maturities, as they provide the highest yields with minimal duration risk.
Alpha Capital Wealth Advisors, LLC is a registered investment adviser. Informaon presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless
otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
