Bond Market Outlook: Improving Returns | Morgan Stanley (2024)

Sources:

1 FRED (Federal Reserve Economic Data) U.S. Treasury Securities at 10-Year Constant Maturity, Quoted on an Investment Basis as of 12/29/2023.

2Diversification does not eliminate the risk of loss.

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The market returns referred to in the commentary are those of representative indices. The index performance is provided for illustrative purposes only and is not meant to depict the performance of a specific investment.Past performance is no guarantee of future results.

Bloomberg U.S. Aggregate Indexis an unmanaged index of domestic investment-grade bonds, including corporate, government and mortgage-backed securities. "Bloomberg®" and the Bloomberg Index/Indices used are service marks of Bloomberg Finance L.P. and its affiliates and have been licensed for use for certain purposes by Morgan Stanley Investment Management (MSIM). Bloomberg is not affiliated with MSIM; does not approve, endorse, review or recommend any product; and does not guarantee the timeliness, accuracy or completeness of any data or information relating to any product.

Risk Considerations: Diversification does not eliminate the risk of loss. Fixed income securities are subject to the ability of an issuer to make timely principal and interest payments (credit risk), changes in interest rates (interest-rate risk), the creditworthiness of the issuer and general market liquidity (market risk). In a rising interest-rate environment, bond prices may fall and may result in periods of volatility and increased portfolio redemptions. In a declining interest-rate environment, the portfolio may generate less income. Longer-term securities may be more sensitive to interest rate changes.

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Bond Market Outlook: Improving Returns | Morgan Stanley (2024)

FAQs

What should bond investors do when interest rates rise? ›

Should I only buy bonds when interest rates are high? There are advantages to purchasing bonds after interest rates have risen. Along with generating a larger income stream, such bonds may be subject to less interest rate risk, as there may be a reduced chance of rates moving significantly higher from current levels.

Why does stock have more potential for higher returns and bonds? ›

Stocks have historically delivered higher returns than bonds because there is a greater risk that, if the company fails, all of the stockholders' investment will be lost (unlike bondholders who might recoup fully or partially the principal of their lending).

How can bonds generate a positive return for investors? ›

Because bonds typically carry less risk than stocks, these assets can be a good choice for investors with less time to recoup losses. Income generation: Bonds provide a fixed amount of income at regular intervals in the form of coupon payments.

Does it make more sense to invest in stocks or bonds Why? ›

Stocks offer the potential for higher returns than bonds but also come with higher risks. Bonds generally offer fairly reliable returns and are better suited for risk-averse investors.

Will bond funds recover in 2024? ›

As for fixed income, we expect a strong bounce-back year to play out over the course of 2024. When bond yields are high, the income earned is often enough to offset most price fluctuations. In fact, for the 10-year Treasury to deliver a negative return in 2024, the yield would have to rise to 5.3 percent.

Are bonds a good investment in 2024? ›

Starting yields, potential rate cuts and a return to contrasting performance for stocks and bonds could mean an attractive environment for fixed income in 2024.

Should you buy bonds when interest rates are high? ›

The answer is both yes and no, depending on why you're investing. Investing in bonds when interest rates have peaked can yield higher returns. However, rising interest rates reward bond investors who reinvest their principal over time. It's hard to time the bond market.

Can you lose money on bonds if held to maturity? ›

After bonds are initially issued, their worth will fluctuate like a stock's would. If you're holding the bond to maturity, the fluctuations won't matter—your interest payments and face value won't change.

What are the five drawbacks of investing in bonds? ›

Bonds have some advantages over stocks, including relatively low volatility, high liquidity, legal protection, and various term structures. However, bonds are subject to interest rate risk, prepayment risk, credit risk, reinvestment risk, and liquidity risk.

What is the bond fund outlook for 2024? ›

In line with the outlook from other investment providers, the firm is forecasting a 5.7% gain in 2024 for U.S. investment-grade bonds, versus 4.9% last year and 2.3% in 2022. (All figures are nominal.)

Should I invest in bonds right now? ›

Short-term bond yields are high currently, but with the Federal Reserve poised to cut interest rates investors may want to consider longer-term bonds or bond funds. High-quality bond investments remain attractive.

What is the safest bond to invest in? ›

Treasuries are generally considered"risk-free" since the federal government guarantees them and has never (yet) defaulted. These government bonds are often best for investors seeking a safe haven for their money, particularly during volatile market periods. They offer high liquidity due to an active secondary market.

What is the average annual return on bonds? ›

When people think about investing for the long run, they often look to average market returns. For example, the broad U.S. stock market delivered a 10.0% average annual return over the past 30 years through the end of 2018, while the average annual return for bonds was 6.1%.

How to get 10% return on investment? ›

Investments That Can Potentially Return 10% or More
  1. Stocks.
  2. Real Estate.
  3. Private Credit.
  4. Junk Bonds.
  5. Index Funds.
  6. Buying a Business.
  7. High-End Art or Other Collectables.
Sep 17, 2023

Will bond funds recover? ›

We expect bond yields to decline in line with falling inflation and slower economic growth, but uncertainty about the Federal Reserve's policy moves will likely be a source of volatility. Nonetheless, we are optimistic that fixed income will deliver positive returns in 2024.

Should I buy when interest rates are high? ›

The bottom line

Today's elevated mortgage rate environment isn't preferable for homebuyers, but it doesn't mean that you should refrain from acting, either. If you discover your dream home, can afford the interest rate, find an affordable house, or have an alternative to rent, it can be worth it for you now.

How to hedge a bond portfolio against rising rates? ›

For bond investors who believe interest rates are rising, the most obvious choice is to reduce the duration of their bond portfolios. Duration measures the sensitivity of the price of a bond to changes in interest rates.

Is now a good time to buy bond funds? ›

Short-term bond yields are high currently, but with the Federal Reserve poised to cut interest rates investors may want to consider longer-term bonds or bond funds. High-quality bond investments remain attractive.

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