Bonds lagged well behind stocks last year. However, a mediocre performance was a big improvement over the huge losses in 2022. Importantly, bonds mounted a strong comeback in the final three months of last year.
Some investors hope that the momentum from the fourth quarter of 2023 will accelerate in the new year. Is the bond market poised to skyrocket in 2024? Here's what Wall Street thinks.
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Unabashed optimism
All eyes on Wall Street are on the Federal Reserve as the new year gets underway. What the Fed does (or doesn't do) will impact the U.S. economy, the stock market, and perhaps most of all, the bond market. There is unabashed optimism from some investment firms at this point.
Scott DiMaggio, head of fixed income for AllianceBernstein, stated in the title of his outlook for 2024, "Bonds roar back." He believes that the Fed is done with interest rate hikes. DiMaggio thinks that rates will begin to come down as inflation gets closer to the Fed's goal of 2%. The European Central Bank could begin easing rates by midyear, in his view.
In this scenario, yields will remain relatively high, but with bond prices rising in the second half of 2024. DiMaggio wrote, "For bond investors, these conditions are nearly ideal."
This rosy outlook doesn't apply only to government bonds. AllianceBernstein projects corporate bonds to perform well also. DiMaggio explained in his 2024 outlook that he doesn't expect a flurry of corporate defaults. He also looks for lower interest rates in the back half of the year to take some of the pressure to refinance off of corporate bond issuers.
Bank of America's Michael Hartnett is also quite bullish about bonds. He thinks that the bond market will "rally big" in 2024 and even rank as the best-performing asset in the first half of the year.
Likewise, Goldman Sachs believes that 2024 will be "the year of the bond." The firm thinks that we're now in the early stages of a period where bonds will stand out as a good alternative to equities.
JPMorgan Chase's Bob Michele and Kelsey Berro predicted in December that U.S. aggregate bonds could return between 10% and 15% this year. If this prediction comes true, they noted that 2024 would be "the best calendar year for the U.S. bond market since 1995."
Put UBS in the optimists' corner as well. The investment bank wrote to clients, "We prefer fixed income to equities in our global strategy for 2024." UBS especially thinks that high-quality bonds will perform well this year.
BMO is more cautious than some of its peers yet still positive about bonds. The company forecasts that bonds will deliver mid-single-digit returns in 2024.
One reason for caution
It's not a slam dunk that bonds will take off this year. Some analysts are concerned that governments in the U.S., U.K., European Union, and Japan will sell more than $2 trillion of new bonds to finance their 2024 budgets.
The influx of new supply of bonds due to the frenzy of selling by governments could hold prices back. A recent article published by Bloomberg quoted ING's Padhraic Garvey as stating, "Right now, the market is just obsessed with the Fed rate cycle. Once the novelty of that fades away, we'll start to worry more about the deficit."
What should investors do?
Smart investors will recognize that neither they nor Wall Street firms can predict the future with a high level of confidence. As a result, their best course of action is to invest with a long-term perspective and build a diversified portfolio.
A diversified portfolio for many investors will include bonds. The exact percentage allocated to bonds will, however, vary depending on several factors, including investment objectives and age.
One good way to invest in bonds is through exchange-traded funds (ETFs) that own a broad mix of bonds. The Vanguard Total Bond Market Index Fund ETF (BND 0.14%) especially stands out, in my view.
NASDAQ: BND
Key Data Points
This ETF owns more than 10,700 bonds with an average duration of 6.3 years. It has an exceptionally low expense ratio of only 0.03%.
There's no guarantee that the bond market or the Vanguard Total Bond Market Index Fund ETF will skyrocket in 2024. However, if bonds perform as well as many on Wall Street expect, this ETF should deliver solid returns.
