Next year promises to be better for bond investors, AllianceBernstein says — Interview
Summary
Bond investors should enjoy much better returns in 2024 as economies weaken and central banks cut interest rates, AllianceBernstein told Dow Jones Newswires.
Bond investors should enjoy much better returns in 2024 as economies weaken and central banks cut interest rates, John Taylor, director for global multi-sector at AllianceBernstein, told Dow Jones Newswires.
Elevated inflation and a recent spike in U.S. government-bond yields have dashed any lingering hopes that 2023 could turn around bond investors’ fortunes, but with interest rates finally reaching a peak the outlook looks brighter.
“Next year could become the year of bond investors," he said in an interview.
“European bond yields represent very good value here, and we don’t think they can be sustained at these levels over an extended period of time."
Taylor’s prognosis is dependent on the U.S. economy slowing as high interest rates take their toll, dragging U.S. bond yields lower.
Bond investors are still seeking greater reassurance that both growth and inflation will weaken. A drop in U.S. consumer demand and employment could prompt that, he said.
“The U.S. economy has held up much better than we and many others would have expected, and the expectation from the beginning of the year that there will be recession at some point of the year, hasn’t materialized."
“I think the mistake that investors are making now is to say that there’s no chance of recession, so they have gone from one extreme to the other," Taylor said.
The eurozone economy has slowed significantly in response to a sharp rise in interest rates but in the U.S. this process has been slower, resulting in high U.S. bond yields which have prevented a meaningful drop in eurozone yields.
“Since economic data started to turn weaker in Europe, European bond yields haven’t been able to go lower, and this is because U.S. yields have shot up," he said.
The European Central Bank has hiked interest rates by a total of 450 basis points since July last year and the U.S. Federal Reserve by a total of 500 basis points since March 2022. This has lifted the ECB’s deposit rate to 4.00% and the Fed funds rate to 5.25%-5.50%.
Both central banks have warned that rates could stay higher for longer due to persistent inflationary pressures.
AllianceBernstein expects both the Fed and ECB to cut rates in the second half of 2024, the ECB around the middle of the year and the Fed a few months later.
Taylor expects the ECB has finished raising interest rates, while there is a 50-50 chance of the Fed hiking rates once more.
Bond investors will need to be aware of the risks posed by oil prices, however.
“If oil prices stay high, it is likely to lead the ECB to extend the period during which rates stay where they are or potentially could open the door to another rate hike," he said.
AllianceBernstein had $691.5 billion assets under management as at June 30, 2023.
Write to Emese Bartha at emese.bartha@wsj.com
