Income is back: three reasons to invest in bonds in 2024

Bonds are back. After a couple of barren years, yields in high-quality bonds that were not too long ago returning just two or three percent in USD and even negative yield in EUR and CHF, are now set to bring five to six percent.

The jump in yields looks to be a game changer for investors. Those demanding returns of between five and six percent from their wealth managers would not too long ago have had little option but to scrape the bottom of the barrel and consider low quality credit. Now, those same yields could be available from much higher rated bonds.

The ability for investors to get the outcomes they want from fixed income, in a stable and reliable fashion, is much more easily achievable, and so here are three reasons why bonds could be an important investment in 2024.

1. The end of rising interest rates

Much of the volatility seen in the fixed income market over the last couple of years was caused by the rapid increase in interest rates. The fact that central banks were battling inflation meant they were pushing base rates higher and adopting a restrictive monetary policy. In other words by making borrowing more expensive they were looking to rein in people’s spending power and therefore curb inflation. This elevated level of interest rates compared with the previous 10+ years ultimately fed through to bond holders as bond yields are inversely affected by monetary policy. However, in an environment of falling interest rates, bond prices rise and therefore bond yields fall. This rise in bond prices gives opportunities to capture capital returns as well as the income those bonds pay out by way of coupon payments.

Although that war on inflation might not be fully won just yet, it does feel like we are close to a victory. Indeed, the message investors are getting from central banks across the globe is that we are now at peak rates. In fact, the Swiss National Bank has already cut interest rates, and the US Federal Reserve has announced that its first rate cut can be expected in the coming months.

The arrival of a new world in which interest rates begin to fall slowly is a promising signal for investors and as a result, government bonds should not be a major headwind for the market in 2024 like they were in 2022 & 2023.

2. Attractive yields

Outright yields now available in the bond market are more attractive than they have been for a very long time. From long-dated government bonds to investment grade and high-yield instruments, the yields investors can aim for are far higher than they were during the recent cycle of rising interest rates.

So, what does that mean? Well, in short, investors are more likely to get the income they want without having to take on as much risk as they did in the past. Investors should no longer need a combination of high-risk strategies to achieve attractive returns, most can now find what they need in less volatile, high quality, fixed income products.

High-quality bonds that were not too long ago yielding just two or three percent are now available at five or six percent and that is a game changer for investors. With inflation expected to fall towards the two-percent target in coming quarters, the real return investors can get from fixed income will look much more attractive than it did only a short time ago.

3. A brighter economic outlook

Coming into 2023 talk of savage recessions and tumbling economies were the base case for many strategists and commentators but even comparing to their outlooks coming into 2024 it was clear that this has now changed radically.

The base case for most investors is one of a soft landing or a mild recession — and neither of those should be bad for credit. What is traditionally bad for credit is a hard landing; that typically creates spluttering economies and a landscape in which default rates spike.

A lot has changed in the last twelve months and the rosier outlook for economies, with inflation finally looking tamed, should present improved opportunities for bond investors.

Time to rediscover Income

Bond investors should have many reasons to be optimistic in 2024. After severe bouts of market volatility and central banks hiking interest rates, this year’s outlook for fixed income is much more positive making finding an attractive level of income, driven by higher yields, contained defaults and falling inflation, much more easily achievable. Talk to our experts about such opportunities.

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