Regardless of whether the global economy experiences a soft landing or a hard landing, or if inflation is sticky or falls back to target, bond returns look promising going into 2024.
This is according to April LaRusse, head of fixed income investment specialists at Insight Investment, BNY Mellon IM.
She told a recent media briefing in Hong Kong that regardless of all the different possible scenarios forecasted by the firm, investment grade bond total returns in 2024 look appealing.
“What struck me when we were doing these scenarios, is that every number is really good,” LaRusse (pictured) said.
“We really can’t get to a scenario where we think: ‘run a mile from bonds’, that’s why we’ve been saying to clients: fixed income definitely should have a higher allocation in investment portfolios at a time like this.”
The firm’s forecasts see investment grade bonds returning 11% in 2024 if growth is positive but below trend, inflation falls to target and spreads narrow.
If growth is modestly negative, inflation falls back to target and spreads widen, the firm forecasts a 9.5% return from the asset class.
Whereas if inflation is sticky and above target, growth stays on trend and spreads remain unchanged, the firm still forecasts a 5.1% return in 2024.
Bond investors are finally “out of the wilderness”
“I can say for the first time in about a decade, we are out of the wilderness,” LaRusse said.
“If you were courageous enough in 2008 to close your eyes and buy corporate bonds, you made a lot of money in what is arguably a low-risk investment,” she added.
LaRusse pointed out that corporate bond yields going into 2024 are at levels not seen since the global financial crisis in 2008.
But for fixed income investors hurt by the bond market rout in 2022, the thought of adding duration might not be appealing after experiencing unprecedented volatility at the long end of the curve throughout most of 2023.
However, LaRusse argued that the market conditions for bonds today are very different than that of the past three years.
“In 2022 you would have feared having interest rate risk, now it’s actually pretty helpful to improving the total return from bonds,” she said.
After increasing rates to their peak, she said central banks typically keep them stable for a duration and cuts will typically occur about six months after.
“So, we’re now getting to the point where it’s right for markets to start thinking that interest rates could be falling,” she said.
Why the recession was delayed in 2023
Last year many market participants grappled with the notion that interest rates could increase to levels not seen in decades and yet the economy would still grow.
Some of the reasons for this strength were a surprisingly resilient consumer, a stronger labour market and a time lag between higher rates and the impact on consumers and businesses.
But LaRusse argued that one important factor which might be overlooked has been the impact of fiscal policy from governments.
She said that politicians last year “rediscovered that they can spend money, and that actually fiscal policy is quite powerful, and frankly, quite popular.”
She pointed to the $1.2trn Infrastructure bill and the $52bn CHIPS and Science Act passed by the US Biden administration, describing them as “more or less industrial policy”.
“Fiscal policy is absolutely helping economies to be quite strong, and even though interest rates are trying to take some heat out, it’s very difficult to take heat out when you have a lot of spending going on,” she explained.
She said it is akin to governments “pressing the accelerator and the brake at the same time while driving”.