Global Insight 2024 Outlook highlights: Bonds are back (2024)

January 9, 2024

Frédérique Carrier
Managing Director, Head of Investment Strategy
RBC Europe Limited

We think a U.S. recession is the most probable outcome in the coming quarters. In the past, the combination of high interest rates and restrictive bank lending standards – what is in place today – has been a recipe for recession. Soft landings, on the other hand, have historically featured rising interest rates but no overt tightening of lending standards. The presence of similar conditions, i.e., high rates and restrictive lending, is already taking a toll in Canada, the UK, and the eurozone.

However, it could be that the big, decisive shifts in fiscal and monetary policy over the past few years continue to have lingering effects on the course of the U.S. economy, and that instead of a decline in GDP, growth is merely on the slow side in 2024.

Regardless of the outcome, the economic headwinds which have been gathering will likely run their course and probably fully dissipate later in the year.

That could be enough to keep S&P 500 earnings growing, and we believe any growth in earnings would leave room for share prices to advance between now and the end of 2024, even if the path for getting there is debatable.

We recommend a Market Weight position in global equities, but we believe investors should consider limiting individual stock selections to high-quality businesses, i.e., those with resilient balance sheets, sustainable dividends, and business models that are not intensely sensitive to the economic cycle.

In our opinion, portfolios that have held their value to a better-than-average degree will be best-equipped to take advantage of the opportunities that are bound to present themselves when a stronger pace of economic growth reasserts itself.

The stock market will need to adjust to the new competition from bonds for investment dollars. For the first time in more than a decade, bond yields have moved back up to levels that make fixed income a fully useable and attractive adjunct to equities in a balanced portfolio. Bonds provide, as they have traditionally done, a combination of reduced volatility, more predictable returns, and the comfort of a maturity value.

If at some point a more defensive structuring for a balanced portfolio is called for, having bonds as a reasonable alternative for an investor looking to take some risk out is a welcome development.

United States

Nimble positioning in equities; bonds could post strong returns

U.S. equities face an unusually high number of crosscurrents in 2024.

There is a wide range of potential economic outcomes possible, as described above.

The market seems positioned for a rosy scenario. Industry analysts’ S&P500 consensus earnings forecast of US$244 per share in 2024 represents 11.1 percent year-over-year growth. This forecast, combined with the market’s 19.3x above-average price-to-earnings ratio, leaves little wiggle room for economic disappointments.

The U.S. presidential election will inevitably generate noise. Investors should remember that since 1928, the S&P 500 rose 7.5 percent on average during presidential election years and ended the year in positive territory almost 75 percent of the time. We believe Fed policy and the economic cycle play greater roles in shaping market returns than political party control in Washington.

Overall, we think S&P 500 returns for the next 12–18 months will largely depend on whether a U.S. recession materializes. But even if one does and the stock market corrects, the market typically establishes a new uptrend partway through the recession period.

The U.S. stock market has historically traded in a four-year pattern associated with elections

S&P 500 performance during presidential election cycles since 1928

Global Insight 2024 Outlook highlights: Bonds are back (1)

The column chart shows average and median S&P 500 performance during the four-year U.S. election cycle from 1928 through 2022. The respective average and median returns are as follows: 7.5% average and 10.7% median return in the election year; 6.6% and 8.1% in year one of the presidential term; 3.3% and 0.6% in year two of the presidential term (this is also the midterm election year); 13.5% and 17.3% in year three of the presidential term.

  • Average
  • Median

Source – RBC Wealth Management, Bloomberg; based on annual data through 2022

To start the year, we recommend maintaining U.S. equities at the Market Weight level to take advantage of the distinct possibility of the S&P 500 reaching new all-time highs in the coming few months. This allocation is also intended to balance the risk of a recession against the possibility that one may be averted.

We anticipate market performance will broaden out beyond the “Magnificent 7” technology-oriented stocks that led by a wide margin for much of 2023.

Investors should consider limiting individual stock selections to companies they would be content to own through a recession – those with strong management teams, robust cash flow generation, and healthy balance sheets. We would tilt portfolio holdings toward reasonably valued stocks of high-quality companies. The valuations of small-capitalization stocks in particular seem to already price in a recession.

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. This is relatively unlikely, in our view, as we expect the Fed to embark on a series of modest rate cuts beginning this summer as the economy loses steam.

The bond market’s repricing of rate cut expectations will likely be most dramatic at the short end of yield curves. Thus, investors should proactively rotate out of cash and/or cash equivalent products and into longer-dated securities, in order to lock in yields for longer – and before they fade away, in our opinion.

Canada

Interest rate risks becoming more two-sided

Restrictive monetary policy continues to work its way through the Canadian economy, weakening it. Meanwhile, inflation risks seem to be easing and additional rate hikes from the Bank of Canada (BoC) are likely on hold, in our view.

For equities, the trajectory of interest rates and the ultimate impact on the consumer will have clear implications for the Canadian banks, in our view. Bank valuations reflect the uncertain environment, and the group trades close to trough levels.

We expect Energy sector stock performance to be largely influenced by commodity prices and note the Canadian energy companies’ fortified balance sheets and reasonable capital expenditure needs.

As for fixed income, historically, adding duration following the last BoC rate hike has led to higher total returns relative to short-duration strategies. We suggest extending maturities through laddering, exposing portfolios to a higher degree of rate sensitivity while minimizing return volatility, which should lead to a smoother path of returns.

United Kingdom

Opportunities despite the subdued economy

Economic data is likely to slip further as the full impact of much higher interest rates increasingly filters through the economy. We think the Bank of England will likely keep the Bank Rate elevated for much of 2024 as core inflation remains sticky and above five percent. We see a risk of stagflation in the UK.

Despite these challenging prospects, we continue to recommend a Market Weight position in UK equities. Their defensive qualities and attractive valuations should be assets given the more volatile backdrop we are expecting in 2024. The Energy sector currently enjoys a favourable risk-reward profile, in our view.

For fixed income, we would add further to Gilts and increase duration. Credit spreads could widen as credit fundamentals worsen. There are pockets of opportunities in non-cyclical issuers and in senior-ranking bank bonds.

Europe

Remain cautious but on the lookout for the next economic upturn

Europe will also likely grapple with anemic economic growth in 2024. The pandemic and the war in Ukraine have compounded the bloc’s long-standing structural issues, such as a lack of competitiveness, which conspire to undermine the effectiveness of the EU single market. European Commission task force recommendations to remedy the situation are due in March 2024.

We continue to recommend an Underweight position in European equities as weakening macro and earnings momentum remain headwinds for the region’s ability to outperform. However, we are watchful for any green shoots and signs that the euro area’s relative economic growth momentum may be improving. This would be a key catalyst to increase allocations given inexpensive valuations.

In fixed income, we would add to sovereign bond positions and duration as the economic outlook looks set to deteriorate further, thus benefiting longer-duration and sovereign positions.

Asia Pacific

Overweight Japan equities; prefer Asian investment-grade credit

We suggest an Overweight stance in Japanese equities, where the outlook appears bright thanks to the launch of a revamped tax-exempt investment scheme for residents, corporate pension reforms, onshoring trends, and efforts at improving corporate governance. Relative economic and political stability combines with low valuations to further enhance this market’s attractiveness.

Given that China’s economic recovery and investor sentiment remain fragile, Chinese equities may continue to trade within a limited range. We would focus on opportunities in industries where China has competitive advantages or which can benefit from policy tailwinds, such as advanced manufacturing and health care.

In Asian fixed income, we continue to prefer investment-grade credit for 2024. The lower U.S. Treasury yields that we expect into 2024 should provide an overall tailwind for Asian credit. We prefer to keep duration short for Asian investment-grade credit due to spread valuations. We like the attractive coupon carry for this resilient segment, but also seek to limit the potential performance impact should valuations reverse.

For more details on these views, as well as forecasts for commodities and currencies, please have a look at our complete Global Insight 2024 Outlook or the individual articles: Investing for a new reality (feature article), as well as the regional focus commentaries on the U.S., Canada, the UK, Europe and Asia.

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Frédérique Carrier

Managing Director, Head of Investment Strategy
RBC Europe Limited

Global Insight 2024 Outlook highlights: Bonds are back (2024)

FAQs

How are bonds performing in 2024? ›

Expecting another strong year in 2024

Following large front-loaded new issue supply, EM IG spreads are now at attractive levels versus U.S. credit, setting up EM debt for outperformance. Our 2024 macroeconomic base case features slowing inflation and growth cushioned by Fed rate cuts.

What is the global bond outlook for 2024? ›

Total OECD government bond debt is projected to increase to USD 56 trillion in 2024, an increase of USD 30 trillion compared to 2008. At the end of 2023, global corporate bond debt reached USD 34 trillion and over 60 per cent of the increase since 2008 came from non-financial corporations.

What is the bond yield forecast for 2024? ›

One exception is that the firm's expectations for high-risk bond types declined slightly. The firm's 10- to 15-year forecast for high-yield bonds is 6.5% for 2024, down from 6.8% for 2023, and its forecast for emerging-markets sovereign bonds dropped to 6.8% from 7.1%.

Is now a good time to buy a bond fund? ›

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.

Should you sell bonds when interest rates rise? ›

Unless you are set on holding your bonds until maturity despite the upcoming availability of more lucrative options, a looming interest rate hike should be a clear sell signal.

What is the 10 year Treasury prediction for 2024? ›

We are revising up our end-2024 and end-2025 forecasts for the 10-year Treasury yield by 25bp, to 4%. This reflects recent changes to our projections for the federal funds rate.

Is 2024 going to be a good year for bonds? ›

Stocks and bonds may both be poised for success in 2024. Easing inflation and a pivoting Fed should reduce headwinds that have faced both asset classes in recent years. Resilient growth may prove to be an additional tailwind for stocks.

Will bonds recover in 2024? ›

Vanguard, the US indexing giant, in its outlook for fixed income in 2024 and beyond said that “bonds are back” and it now expects US bonds to return an annualised 4.8%–5.8% over the next decade. This compares very favourably with the 1.5%–2.5% it expected before the rate-hiking cycle began at the end of 2021.

Will bond prices recover in 2024? ›

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.

What will interest rates be in 2024 2025? ›

30-Year Fixed Mortgage Rate Forecasts
2024 Forecast2025 Forecast
Fannie Mae6.6%6.2%
Mortgage Bankers Association6.1%*5.6%
National Association of Home Builders6.61%6.01%
National Association of Realtors6.5%6.1%
3 more rows

What is the best bond to purchase? ›

  • Vanguard Total World Bond ETF (BNDW)
  • Vanguard Core-Plus Bond ETF (VPLS)
  • DoubleLine Commercial Real Estate ETF (DCRE)
  • Global X 1-3 Month T-Bill ETF (CLIP)
  • SPDR Portfolio Corporate Bond ETF (SPBO)
  • JPMorgan Ultra-Short Income ETF (JPST)
  • iShares 7-10 Year Treasury Bond ETF (IEF)
  • iShares 10-20 Year Treasury Bond ETF (TLH)
Apr 8, 2024

What is the 10 year bond prediction? ›

The US 10 Year Treasury Bond Note Yield is expected to trade at 4.11 percent by the end of this quarter, according to Trading Economics global macro models and analysts expectations. Looking forward, we estimate it to trade at 3.85 in 12 months time.

Why are bonds losing money right now? ›

Rising interest rates directly caused stock and bond prices to fall in 2022. Interest rates affect a company's capital and earnings in many ways, says Damian Pardo, a certified financial planner and city commissioner in Miami, Florida. First, companies made less.

Should I invest in bonds or CDs? ›

CDs are an excellent place to park your cash and earn interest on your balance. Although there's a risk of inflation outpacing CD interest rates, they are virtually guaranteed earnings. Bonds, on the other hand, may deliver higher returns and regular income via interest payments.

What is the best bond ETF to buy? ›

Some of the best bond ETFs to buy include SPDR Portfolio High Yield Bond ETF (NYSE:SPHY), iShares 0-5 Year TIPS Bond ETF (NYSE:STIP), and SPDR Portfolio Corporate Bond ETF (NYSE:SPBO). We curated our list of the best bond ETFs by choosing consensus picks from multiple credible websites.

Is it a good time to buy bonds 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.

Are high yield bonds a good investment in 2024? ›

In 2024, we expect the U.S. economy to slow, which could spark some volatility in the equity market. As a way to help investors manage portfolio risk while earning income, high yield bonds merit a look.

What does Morningstar predict for 2024? ›

While Morningstar economists expect real GDP growth to slow in 2024, our longer-term outlook is optimistic. Our researchers predict the U.S. economy will feel the lagged effects of the Federal Reserve's interest rate hikes. Consumers also seem cautious as household excess savings deplete.

What is the junk bond forecast? ›

US junk bond spreads are expected to narrow to 291 basis points by the year-end, Goldman's strategists wrote. Yield premiums on high-grade financial bonds will likely move below those of non-financials this year, they said.

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