Washigton: There are encouraging signs that next year will be a better one for bond investors following brutal losses in 2022.
After being smashed for much of this year by runaway inflation and breakneck interest-rate hikes from the Federal Reserve, positive returns are making a comeback in Treasuries and the market is poised for its second straight month of positive total returns. It’s been helped by a now-elevated running yield and a rebound in bond prices that’s been fueled by recession fears and signs of slowing consumer-price gains.
Of course, that’s only a slight consolation following a horrid year of losses “- the biggest in at least half a century. But the factors fueling market action more recently suggest that 2023 is likely to be less painful for bondholders.
The benchmark 10-year Treasury yield, which ended this week at 3.75 per cent, is more than half a percentage point below its October peak. And with the Fed vowing to keep hiking rates to really break inflation, expectations for an economic slump next year are growing, which could keep downward pressure on yields.
“Fixed income is going to have increased value for investors over the course of the next 12, maybe 24 months,” Mark Cabana, head of US interest rates strategy at Bank of America Corp. said on Bloomberg Television this week. “You will be seeing yields that will probably be moving lower and yields that have value in portfolios again. Investors should be thinking more constructively about fixed income broadly.”
Cushion effect
The increase in yields also means that bonds are more appealing on a relative basis versus equities. With the prospects of an economic slump dimming the outlook for corporate America right now, the estimated dividend yield that stocks offer is looking less attractive compared to fixed income.
“You’ve got a cushion now,” if bond prices go down, Bianco Research’s Jim Bianco said on Bloomberg Television this week. “You’ve got an interest rate that we haven’t seen in 15 years.”
There are few scheduled events likely to reshape the fundamental narrative in the final, holiday-shortened trading week for 2022. But with liquidity thin, and a condensed slate of coupon-bearing debt auctions to come, there is still some scope for choppy activity in the market itself.
Meanwhile, interest-rate aficionados will also be keenly focused on potential issues in short-end funding markets. Rates on repurchase agreements suggest traders are expecting this year-end to be relatively uneventful, but it isn’t always and any disruption has the potential to roil money markets more broadly, meaning it will still be a key risk to watch as the final days of a turbulent 2022 slip into the history books.
