Investing | bond market outlook | Fidelity (2024)

With the S&P 500 up by double digits over the past year, it may be tempting for investors to ignore bonds. Compared to the stock market, a 5% yield on a high-quality investment-grade corporate or US Treasury bond is hard to get excited about. And those yields appear to be the good news about bonds. In addition to yields, the other part of a bond’s total return is its price, and as of April 8, 2024, bond prices as represented by the Bloomberg US Aggregate Bond Index are lower than they were a year ago.

So why then does Jeff Moore, manager of the Fidelity^® Investment-Grade Bond Fund (FBNDX) say that he’s “feeling better than he has in years about the prospects for bonds”?

Moore’s optimism comes from the fact that it’s possible to buy high-quality bonds with yields that are higher than they’ve been in years at prices that are still low enough to offer the potential for longer-term capital appreciation. “As yields have moved higher, this asset class is the most attractive it’s been in a long time,” he says. “As recently as 2 years ago, the average yield of the Bloomberg US Aggregate Bond Index, known as 'the agg,' which reflects the broadest overall measure of the US bond market, yielded just 1.42%. Now the agg has an average yield of 5%, intermediate-maturity investment grade bond yields average 5.35%, and longer maturities offer an average yield of 5.65%.”

Moore says that those high yields are not only a good source of income, they may also increase the attractiveness of bonds that are more sensitive to possible future changes in interest rates. To understand how susceptible a bond may be to interest rate risk, experienced investment managers look at a metric known as the bond's duration. Investing in bonds with shorter duration can be a way to help reduce the interest rate risk facing the bond portion of your portfolio. But Moore says that today’s high yields make duration less of a concern. “The more yield you can put into the portfolio—without taking excess risk, of course—the greater the potential for return, regardless of what else may happen with rates,” he says. By helping lower the risks of longer-duration bonds, higher yields are helping to create more potential opportunities for would-be bond buyers.

But why bother with bonds?

That combination of relatively high yields, reasonable prices, and an expanding opportunity set may not offer the sizzle of a high-flying stock market but that may be exactly the reason to consider adding bonds to your portfolio in the months ahead.

Stocks have shown so far this year that they can move upward quickly. But they can also move down with similar speed. Three years ago, for example, stocks were marching higher, month after month. The Financial Times went so far as to call the markets "boring." Then on July 19, 2021, the S&P 500 suddenly dropped 3% in a single day, bond yields fell, and investors got an attention-grabbing reminder of how bonds played a critical role in their portfolios. Those falling yields meant that the bonds' prices were rising and investors with fixed income assets in their portfolios could take comfort in the fact that the impact of falling stocks on the value of their portfolios was being offset by gains from their bonds.

While this sort of ability to protect capital may not be as inspiring as rising stock prices, it may be at least as important for many investors. As baby boomers exit the workforce and those born in the later 1960s and 1970s eye retirement on the horizon, many may be more concerned with holding on to what they have than with pursuing growth.

And what about interest rates?

Roughly half the yield of a typical corporate bond is determined by the rates on 10-year bonds issued by the US Treasury, the rest by the credit quality and other fundamentals of the issuer of the bond. The high yields that are a big part of bonds’ current attractiveness are largely a product of the Federal Reserve's campaign to lower inflation to around 2% by raising interest rates and keeping them high until inflation stays low. But while inflation has come down, many of the economic indicators that the Fed’s leaders base policy decisions on don’t suggest that the time has come to cut rates.

For those investors interested in bonds, but uncertain about the timing and impact of potential rate cuts, it’s good to consider that the CME Group’s survey of interest rate traders sees little likelihood of a rate cut before the 3rd quarter of 2024.

So if you are on the sidelines waiting in cash, it may be a good time to take advantage of the opportunities that current high yields are creating in bonds.

Investing in a bond mutual fund or ETF

Buying shares of a bond mutual fund or ETF is an easy way to add a bond position. Bond funds hold a wide range of individual bonds, which makes them an easy way to diversify your holdings even with a small investment.

An actively managed fund also gives you the benefits of professional research. For example, the managers can make decisions about which bonds to buy and sell based on huge volumes of information including bond prices, the credit quality of the companies and governments that issue them, how sensitive they may be to changes in interest rates, and how much interest they pay.

Not all bond funds are actively managed. Investors who seek bond exposure in a fund can also choose among exchange-traded and index funds that track bond market indexes such as the Bloomberg Barclays Aggregate Bond Index.

Here's more about the difference between investing in bond mutual funds and individual bonds.

Investing in individual bonds

If you have enough money and believe you have the time, skill, and will to build and manage your own portfolio, buying individual bonds may be appealing. Unlike investing in a fund, doing it yourself lets you choose specific bonds and hold them until they mature, if you choose. However, you still would face the risks that an issuer might default or call the bonds prior to maturity. So this approach requires you to closely monitor the finances of each issuer whose bonds you're considering. You also need enough money to buy a variety of bonds to help diversify away at least some risk. If you are buying individual bonds, Fidelity suggests you spread investment dollars across multiple bond issuers.

Fidelity offers over 100,000 bonds, including US Treasury, corporate, and municipal bonds. Most have mid- to­ high-quality credit ratings that would be appropriate for a core bond portfolio.

Tools and resources for investors looking for individual bonds include:

• Screeners to help you find available bonds
• Tools to build a bond ladder
• Alerts to let you know when your bonds are maturing
• Fidelity's Fixed Income Analysis Tool to help you understand your portfolio
• Learn more about individual bonds.

Personalized management

Separately managed accounts (SMAs) combine the professional management of a mutual fund with some of the customization opportunities of doing it yourself. In an SMA, you invest directly in the individual bonds, but they are managed by professionals who make decisions based on factors such as current market conditions, interest rates, and the financial circ*mstances of bond issuers. Find out more about separately managed accounts.

Whatever your bond investing goals, professionally managed mutual funds or separately managed accounts can help you. You can run screens using the Mutual Fund Evaluator on Fidelity.com. If you are looking for a high-quality intermediate-term fund, here are some ideas from the Fidelity Mutual Fund Evaluator, as of April 15, 2024.

Intermediate bond mutual funds

• Fidelity^® Total Bond Fund (FTBFX)
• Fidelity^® Intermediate Bond Fund (FTHRX)
• Fidelity^® Investment Grade Bond Fund (FBNDX)

ETFs

• Fidelity^® Total Bond ETF (FBND)
• Fidelity^® Corporate Bond ETF (FCOR)
• iShares Core US Aggregate Bond ETF (AGG)
• iShares Core Total USD Bond Market ETF (IUSB)