Investing | bond market outlook | Fidelity (2024)

Stocks have been surging, but bonds still matter.

Investing | bond market outlook | Fidelity (1)

Key takeaways

  • Relatively high yields on investment-grade bonds are creating opportunities for both professional investment managers and individual investors.
  • Higher yields are reducing risks posed by interest rate uncertainty and enabling bond fund managers to invest in a wider variety of bonds.
  • Higher yields enable individual bonds to once again play their traditional role as sources of reliable, low-risk income for investors who buy and hold them to maturity.
  • Professional investment managers have the research, resources, and investment expertise necessary to identify these opportunities and help manage the risks associated with buying and selling bonds when interest rates are likely to change.

With the S&P 500 up by double digits over the past year, it may be tempting for investors to ignore bonds. Compared to the stock market, a 5% yield on a high-quality investment-grade corporate or US Treasury bond is hard to get excited about. And those yields appear to be the good news about bonds. In addition to yields, the other part of a bond’s total return is its price, and as of April 8, 2024, bond prices as represented by the Bloomberg US Aggregate Bond Index are lower than they were a year ago.

So why then does Jeff Moore, manager of the Fidelity® Investment-Grade Bond Fund (FBNDX) say that he’s “feeling better than he has in years about the prospects for bonds”?

Moore’s optimism comes from the fact that it’s possible to buy high-quality bonds with yields that are higher than they’ve been in years at prices that are still low enough to offer the potential for longer-term capital appreciation. “As yields have moved higher, this asset class is the most attractive it’s been in a long time,” he says. “As recently as 2 years ago, the average yield of the Bloomberg US Aggregate Bond Index, known as 'the agg,' which reflects the broadest overall measure of the US bond market, yielded just 1.42%. Now the agg has an average yield of 5%, intermediate-maturity investment grade bond yields average 5.35%, and longer maturities offer an average yield of 5.65%.”

Moore says that those high yields are not only a good source of income, they may also increase the attractiveness of bonds that are more sensitive to possible future changes in interest rates. To understand how susceptible a bond may be to interest rate risk, experienced investment managers look at a metric known as the bond's duration. Investing in bonds with shorter duration can be a way to help reduce the interest rate risk facing the bond portion of your portfolio. But Moore says that today’s high yields make duration less of a concern. “The more yield you can put into the portfolio—without taking excess risk, of course—the greater the potential for return, regardless of what else may happen with rates,” he says. By helping lower the risks of longer-duration bonds, higher yields are helping to create more potential opportunities for would-be bond buyers.

But why bother with bonds?

That combination of relatively high yields, reasonable prices, and an expanding opportunity set may not offer the sizzle of a high-flying stock market but that may be exactly the reason to consider adding bonds to your portfolio in the months ahead.

Stocks have shown so far this year that they can move upward quickly. But they can also move down with similar speed. Three years ago, for example, stocks were marching higher, month after month. The Financial Times went so far as to call the markets "boring." Then on July 19, 2021, the S&P 500 suddenly dropped 3% in a single day, bond yields fell, and investors got an attention-grabbing reminder of how bonds played a critical role in their portfolios. Those falling yields meant that the bonds' prices were rising and investors with fixed income assets in their portfolios could take comfort in the fact that the impact of falling stocks on the value of their portfolios was being offset by gains from their bonds.

While this sort of ability to protect capital may not be as inspiring as rising stock prices, it may be at least as important for many investors. As baby boomers exit the workforce and those born in the later 1960s and 1970s eye retirement on the horizon, many may be more concerned with holding on to what they have than with pursuing growth.

And what about interest rates?

Roughly half the yield of a typical corporate bond is determined by the rates on 10-year bonds issued by the US Treasury, the rest by the credit quality and other fundamentals of the issuer of the bond. The high yields that are a big part of bonds’ current attractiveness are largely a product of the Federal Reserve's campaign to lower inflation to around 2% by raising interest rates and keeping them high until inflation stays low. But while inflation has come down, many of the economic indicators that the Fed’s leaders base policy decisions on don’t suggest that the time has come to cut rates.

For those investors interested in bonds, but uncertain about the timing and impact of potential rate cuts, it’s good to consider that the CME Group’s survey of interest rate traders sees little likelihood of a rate cut before the 3rd quarter of 2024.

So if you are on the sidelines waiting in cash, it may be a good time to take advantage of the opportunities that current high yields are creating in bonds.

Investing in a bond mutual fund or ETF

Buying shares of a bond mutual fund or ETF is an easy way to add a bond position. Bond funds hold a wide range of individual bonds, which makes them an easy way to diversify your holdings even with a small investment.

An actively managed fund also gives you the benefits of professional research. For example, the managers can make decisions about which bonds to buy and sell based on huge volumes of information including bond prices, the credit quality of the companies and governments that issue them, how sensitive they may be to changes in interest rates, and how much interest they pay.

Not all bond funds are actively managed. Investors who seek bond exposure in a fund can also choose among exchange-traded and index funds that track bond market indexes such as the Bloomberg Barclays Aggregate Bond Index.

Here's more about the difference between investing in bond mutual funds and individual bonds.

Investing in individual bonds

If you have enough money and believe you have the time, skill, and will to build and manage your own portfolio, buying individual bonds may be appealing. Unlike investing in a fund, doing it yourself lets you choose specific bonds and hold them until they mature, if you choose. However, you still would face the risks that an issuer might default or call the bonds prior to maturity. So this approach requires you to closely monitor the finances of each issuer whose bonds you're considering. You also need enough money to buy a variety of bonds to help diversify away at least some risk. If you are buying individual bonds, Fidelity suggests you spread investment dollars across multiple bond issuers.

Fidelity offers over 100,000 bonds, including US Treasury, corporate, and municipal bonds. Most have mid- to­ high-quality credit ratings that would be appropriate for a core bond portfolio.

Tools and resources for investors looking for individual bonds include:

  • Screeners to help you find available bonds
  • Tools to build a bond ladder
  • Alerts to let you know when your bonds are maturing
  • Fidelity's Fixed Income Analysis Tool to help you understand your portfolio
  • Learn more about individual bonds.

Personalized management

Separately managed accounts (SMAs) combine the professional management of a mutual fund with some of the customization opportunities of doing it yourself. In an SMA, you invest directly in the individual bonds, but they are managed by professionals who make decisions based on factors such as current market conditions, interest rates, and the financial circ*mstances of bond issuers. Find out more about separately managed accounts.

Whatever your bond investing goals, professionally managed mutual funds or separately managed accounts can help you. You can run screens using the Mutual Fund Evaluator on Fidelity.com. If you are looking for a high-quality intermediate-term fund, here are some ideas from the Fidelity Mutual Fund Evaluator, as of April 15, 2024.

Intermediate bond mutual funds

  • Fidelity® Total Bond Fund (FTBFX)
  • Fidelity® Intermediate Bond Fund (FTHRX)
  • Fidelity® Investment Grade Bond Fund (FBNDX)

ETFs

  • Fidelity® Total Bond ETF (FBND)
  • Fidelity® Corporate Bond ETF (FCOR)
  • iShares Core US Aggregate Bond ETF (AGG)
  • iShares Core Total USD Bond Market ETF (IUSB)
Investing | bond market outlook | Fidelity (2024)

FAQs

What happens to bonds during a recession? ›

Bonds, particularly government bonds, are often seen as safer investments during recessions. When the economy is in a downturn, investors may shift their portfolios towards bonds as a "flight to safety" to protect their capital. This shift increases the demand for bonds, raising their price but reducing their yield.

What is the yield to worst in Fidelity? ›

Yield stated is the Yield to Worst—the yield if the worst possible bond repayment takes place, reflecting the lower of the yield to maturity or the yield to call based on the previous close. This field shows at what point in time the rate of return on your investment was calculated (e.g., at maturity).

Should I buy high yield bonds now? ›

Additionally, the quality of high-yield bonds has improved recently, according to Northern Trust. “High yield issuers generally have become larger and more diversified, improving their ability to weather economic adversity.” In 2024, a high-yield bond could potentially be a way to diversify an investor's portfolio.

What happens to bond prices when interest rates go down? ›

Bond prices have an inverse relationship with interest rates. This means that when interest rates go up, bond prices go down and when interest rates go down, bond prices go up.

Is it better to be in stocks or bonds during a recession? ›

The short answer is bonds tend to be less volatile than stocks and often perform better during recessions than other financial assets.

Should you sell bonds when interest rates rise? ›

If bond yields rise, existing bonds lose value. The change in bond values only relates to a bond's price on the open market, meaning if the bond is sold before maturity, the seller will obtain a higher or lower price for the bond compared to its face value, depending on current interest rates.

What is the 4% rule for Fidelity? ›

Withdraw too much and you risk running out of money. Withdraw too little and you may not live the life you want to in retirement. Our guideline is to limit withdrawals to 4% to 5% of your initial retirement savings,4 then keep increasing this withdrawal based on inflation.

What is the rule of 6% fidelity? ›

If the interest rate on your debt is 6% or greater, you should generally pay down debt before investing additional dollars toward retirement. This guideline assumes that you've already put away some emergency savings, you've fully captured any employer match, and you've paid off any credit card debt.

Will bonds do well in 2024? ›

Investment-grade corporate bonds remain attractive given their lower risk and relatively high yields. Long-term investors who can handle volatility might consider high-yield bonds and preferred securities, but we wouldn't suggest large positions in either.

Should I be in bonds right now? ›

Answer: Now may be the perfect time to invest in bonds. Yields are at levels you could only dream of 15 years ago, so you'd be locking in substantial, regular income. And, of course, bonds act as a diversifier to your stock portfolio.

What percentage of a portfolio should be in high-yield bonds? ›

Meketa Investment Group recommends that most diversified long-term pools consider allocating to high yield bonds, and if they do so, between five and ten percent of total assets in favorable markets, and maintaining a toehold investment even in adverse environments to permit rapid re-allocation should valuations shift.

Can you lose money on bonds if held to maturity? ›

If you're holding the bond to maturity, the fluctuations won't matter—your interest payments and face value won't change.

Why are bonds losing money right now? ›

Why rising interest rates pushed bond prices down, too. Bond interest rates are usually set upon purchasing a bond. When rates rise, new bonds with higher rates are issued and become more desirable than bonds with lower rates. As a result, the value of the bonds people already own with lower rates will fall.

What happened to bonds during the 2008 recession? ›

When the crisis hit, junk bond yield prices fell and thus their yields skyrocketed. The yield-to-maturity (YTM) for high-yield or speculative-grade bonds rose by over 20% during this time with the results being the all-time high for junk bond defaults, with the average market rate going as high as 13.4% by Q3 of 2009.

Is it good to buy bonds when interest rates are falling? ›

Key Takeaways. Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price.

Are bonds a safe investment right now? ›

Answer: Now may be the perfect time to invest in bonds. Yields are at levels you could only dream of 15 years ago, so you'd be locking in substantial, regular income. And, of course, bonds act as a diversifier to your stock portfolio.

What gets cheaper during a recession? ›

Because a decline in disposable income affects prices, the prices of essentials, such as food and utilities, often stay the same. In contrast, things considered to be wants instead of needs, such as travel and entertainment, may be more likely to get cheaper.

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