Fixed-Income Outlook 2024: Bonds Roar Back

The tide has turned for bonds. Here’s what we think is in store for 2024. technical conditions clouded the fundamental picture

Yields to Trend Lower

Key central bank rates and bond yields remain high globally and are likely to remain elevated well into 2024 before retreating. Further, the chance of higher policy rates from here is slim; the potential for rates to decline is much higher.

In the euro area, for example, after years of negative yields, AAA-rated 10-year German Bunds currently yield 2.0%. Meanwhile, inflation in the region is heading back toward target. Given weak expected growth, the European Central Bank may need to ease midyear.

In the US, where inflation—while declining—is still well above the Federal Reserve’s target, we expect rates to remain elevated into the second half of 2024. Given current trends in economic data, we think the Fed has completed its rate-hiking cycle and will remain on pause until inflation is closer to 2%, when it can begin to ease in the face of cooling US growth. Despite Treasuries’ recent rally, yields remain very compelling, with the US 10-year Treasury now yielding 3.9%.

For bond investors, these conditions are nearly ideal. After all, most of a bond’s return over time comes from its yield. And falling yields—which we expect in the latter half of 2024—boost bond prices. Investors should consider extending duration in this environment to gain exposure to rates.