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Business News/ News / Bonds Could Be the Star Asset Class of 2024 — Talking Markets
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Bonds Could Be the Star Asset Class of 2024 — Talking Markets

wsj

Bond investors are increasingly optimistic that 2024 will be a good year for fixed-income assets as interest-rate hikes finally look to have come to an end.

This is expected to give bonds a renewed shine after yields rose sharply for much of 2023.Premium
This is expected to give bonds a renewed shine after yields rose sharply for much of 2023.

Bond investors are increasingly optimistic that 2024 will be a good year for fixed-income assets as interest-rate hikes finally look to have come to an end.

With inflation dropping back and economies faltering, investors are now looking to the prospect of rate cuts as early as in the first half of next year.

This is expected to give bonds a renewed shine after yields rose sharply for much of 2023.

“Relative to equities, we believe bonds have rarely been as attractive as they appear today," said Pimco portfolio managers in their 2024 outlook. “Bonds emerge as a standout asset class."

Weak economic growth and diminishing inflation give bonds “strong prospects, resilience, diversification, and attractive valuations compared with equities," Pimco said.

Backing up this view, Bank of America’s November global fund manager survey showed a “big conviction" that bond yields would fall in 2024.

Investors’ overweight position in bonds was the largest since March 2009, Bank of America said, adding that the big change in this month’s survey was “the conviction in lower inflation, rates, and yields."

This positioning reflects a growing expectation that interest rates have reached their peak.

As interest rates peak, bond yields peak too. After a year in which bond yields jumped to multi-year highs this could be a perfect time to lock in profits by picking up higher returns.

“It’s a good time to be exposed to government and corporate bonds as yields should retrace, and as they now offer very attractive coupons," Mondher Bettaieb-Loriot, head of corporate bonds at Vontobel, told Dow Jones Newswires.

“If, on top of that, bond yields start retracing because hopefully inflation continues to travel down, then investors have capital gains, which is quite attractive for them," he said.

Even if sticky inflation were to force central banks to raise interest rates again, current yields are still attractive.

“Yields now offer a larger buffer against further rate increases," said Jim Smigiel, chief investment officer at SEI.

A “bull case" for bonds—where they rise significantly—could materialize if the economy enters recession and/or if equities and other risk assets experience a significant selloff, he said.

Some argue, however, that next year’s outlook for bonds is only good relative to a very bad year in 2023.

“The outlook for bonds isn’t spectacular but 2024 will definitely be a better year," Charles Diebel, head of fixed income at Mediolanum International Funds, told Dow Jones Newswires.

“The reason why 2023 wasn’t a year for bonds was simply that data didn’t turn out for the worse," he said.

Write to Emese Bartha at emese.bartha@wsj.com

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