Where to Invest In Bonds Now (2024)

The Federal Reserve’s aggressive interest-rate increases brought bond investors a silver lining: significantly higher yields. With the central bank now focused on cutting rates and bond market yields already off their peak, have investors missed the boat?

“The short answer is: definitely not,” says Mike Cudzil, a fixed-income portfolio manager at Pimco. “Yields are still attractive.”

What’s key for investors to remember is that “lower” is all relative. Bond market strategists and fund managers generally agree that yields are still attractive, especially relative to inflation, and will likely stay higher than before the pandemic.

As a result, there are plenty of opportunities in the fixed-income sector, as long as inflation continues on its downward (if occasionally bumpy) path. Additionally, the bond allocation in investors’ portfolios could offer price appreciation as rates fall in the months ahead.

How Are Bonds Performing?

Bonds snapped a two-year losing streak in 2023, but the road back to the green has been treacherous. Yields on the 10-year Treasury peaked at just under 5% in October, then dropped to as low as 3.79% at the end of December.

That catalyst was good news on inflation that investors took to suggest the Fed was finished with its historic tightening cycle and would soon turn to cut rates. (Bond yields and prices move in the opposite direction.) The narrative shifted again at the end of the year, amid continued data showing a strong economy and inflation news turning unexpectedly sour.

That led traders to push back their expectations for when the Fed’s first rate cut will come and to pare back their forecasts of how many times the central bank will ultimately cut rates this year. As a result, yields on the 10-year note have climbed, reaching a high of 4.33% this past week.

Treasury Yield and Federal-Funds Rate

This back and forth in the bond market has left the Morningstar Core Bond Index down roughly 1.2% in 2024, though it’s still up 7.7% from its October 2023 low.

Yields Are Still Relatively High

Even as the bond market sold off in recent weeks, the Fed is sticking to its narrative of rate cuts in 2024. At this past week’s meeting, the median forecast from Fed officials was for three rate cuts this year, with many in the markets expecting the first to come in June.

With peak yields likely in the rearview mirror, investors may wonder if they have missed their chance to add more income to their portfolios.

“Maybe it’s not the opportunity it was last October,” says John Bellows, a portfolio manager at the fixed-income-focused Western Asset, “but it’s still a fairly high yield.” He says that’s because the Fed is still a few months away from cutting rates, and the extent of those cuts is still murky. He expects yields to move lower as that path becomes more clear.

Cudzil points to so-called real yields, which are adjusted for inflation. With the 10-year US Treasury note yielding around 4.25%, the real yield comes in just under 2%. If inflation falls even further during 2024, as most analysts expect, that already attractive return will only improve. “With an inflation rate coming down, by the Fed’s projections, to 2.5% by the end of the year, that’s a pretty attractive real rate of return,” Cudzil says.

Where to Invest In Bonds Now

Cudzil says investors improve the yields they earn from Treasuries by looking to other investment-grade bonds. He generally likes securitized products like government agency-backed mortgages over investment-grade corporate credit because they offer a better relative value on yield, liquidity, and quality.

That’s not to say that investment-grade corporate credit is without its merits. Recently, strategists from Bank of America described today’s high yields and confidence surrounding eventual rate cuts as a goldilocks environment for high-quality corporate bonds. “The thesis for buying bonds ahead of a cutting cycle remains intact,” they wrote. Within the category, Cudzil favors the Big Six financial companies (major banks including JPMorgan Chase JPM and Bank of America BAC) and some utility companies.

Overall, Cudzil sees what bond traders call the “belly” of the yield curve (bonds maturing between five and 10 years) as “the best place to put money to work.” That time frame includes the likely bottom of the Fed’s next rate cut cycle. Meanwhile, Bellows says the shorter maturities have become more attractive as the market has reduced its expectations for rate cuts.

US Treasury Yield Curves

Bonds Could See Price Appreciation If the Economy Stumbles

On Wednesday, Fed Chair Jerome Powell acknowledged that some scenarios (such as a “significant weakening” in the labor market) would prompt the central bank to reduce rates more quickly than it currently expects. That might send stocks lower, but it would also be a boon for bond prices—which, along with yields, determine how much an investor earns.

“Not only will you get your yield,” Cudzil says, “but you’ll get a more positive return because rates will come down.” This is a major difference from just six months ago, he says. Yields were a little higher, but the market was less certain about how the Fed would react to a stumbling economy, since inflation still looked sticky. “The Fed just told us that most likely, they will react if the economy underperforms. You could argue it makes fixed income even more attractive,” Cudzil explains.

Ahead of Rate Cuts, Bonds Are Even More Important for Portfolios

Bellows says the performance of the markets in the first three months of the year—stocks rising as bond yields rise and bond prices fall—is a sign that we’re returning to the classic negative correlation between stocks and bonds. That inverse relationship is why bonds are so powerful as diversifiers, but it was seriously upended in 2022 when stocks and bonds plummeted simultaneously.

“What we’re seeing so far this year is the normal relationship where yields move higher in an environment that’s good for risk assets,” Bellows adds. “It’s our expectation that it would work in the reverse if some shock were to happen.”

In other words, investors may again look to bonds to help insulate their portfolios against unexpected drops in the stock market. Yields may be slightly lower than last fall, but investors can make up some of that difference with valuable peace of mind.

Be Wary of Holding Cash for Too Long

Cudzil also has a warning for investors who may be reluctant to give up any historically high returns on their cash in money market funds: While those returns are “certainly” good right now, “we think you’re getting closer to the point where ... reinvestment risk materializes.” This is the possibility that an investor may be unable to invest the proceeds from their current investments at the same rate of return they’re currently earning. In this case, it means 5% or greater yields on cash holdings won’t be around forever. Once the Fed starts lowering rates, those yields will drop.

“Your rate will most likely be lower, and most likely to going down over the next few months, and then be going down over the next few months,” Cudzil says. Not to mention the risk that stocks fall at the same time, which would prompt the Fed to lower rates even faster, in which case an investor who held cash for too long would also miss out on the diversification benefits associated with bonds. “I would argue for moving [into bonds] a little bit sooner,” he says.

The author or authors do not own shares in any securities mentioned in this article.Find out about Morningstar’s editorial policies.

Where to Invest In Bonds Now (2024)

FAQs

Which bonds to invest in now? ›

9 of the Best Bond ETFs to Buy Now
ETFExpense ratioYield to maturity
SPDR Portfolio Corporate Bond ETF (SPBO)0.03%5.5%
JPMorgan Ultra-Short Income ETF (JPST)0.18%5.5%
iShares 7-10 Year Treasury Bond ETF (IEF)0.15%4.4%
iShares 10-20 Year Treasury Bond ETF (TLH)0.15%4.6%
5 more rows
Apr 8, 2024

Where do you go to invest in bonds? ›

Unlike stocks, bonds aren't publicly traded on an exchange. Instead, bonds are traded over the counter, meaning that you must buy them from brokers. However, you can buy U.S. Treasury bonds directly from the government.

Should you sell bonds when interest rates rise? ›

If bond yields rise, existing bonds lose value. The change in bond values only relates to a bond's price on the open market, meaning if the bond is sold before maturity, the seller will obtain a higher or lower price for the bond compared to its face value, depending on current interest rates.

Is there a best time to buy bonds? ›

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. If your goal for investing in bonds is to reduce portfolio risk and volatility, it's best not to wait.

Which bonds pay the highest interest rate? ›

Our picks at a glance
RankFundYield
1Vanguard High-Yield Corporate Fund Investor Shares (VWEHX)6.40%
2T. Rowe Price High Yield Fund (PRHYX)7.02%
3PGIM High Yield Fund Class A (PBHAX)7.22%
4Fidelity Capital & Income Fund (FAGIX)6.16%
5 more rows
Mar 15, 2024

Which bond gives the highest return? ›

High Yield Bonds
Bond NameCouponYield
SPANDANA SPHOORTY FINANCIAL LIMITED10.750011.2965%
MAS FINANCIAL SERVICES LIMITED10.750011.2901%
AYE FINANCE PRIVATE LIMITED10.600011.0000%
PIRAMAL CAPITAL & HOUSING FINANCE LIMITED6.750011.0000%
5 more rows

How much is a $100 savings bond worth after 20 years? ›

How to get the most value from your savings bonds
Face ValuePurchase Amount20-Year Value (Purchased May 2000)
$50 Bond$100$109.52
$100 Bond$200$219.04
$500 Bond$400$547.60
$1,000 Bond$800$1,095.20

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? ›

After weighing your timeline, tolerance to risk and goals, you'll likely know whether CDs or bonds are right for you. CDs are usually best for investors looking for a safe, shorter-term investment. Bonds are typically longer, higher-risk investments that deliver greater returns and a predictable income.

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.

Will bonds 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.

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.

Is there a downside to buying bonds? ›

Key Points. Pros: I bonds come with a high interest rate during inflationary periods, they're low-risk, and they help protect against inflation. Cons: Rates are variable, there's a lockup period and early withdrawal penalty, and there's a limit to how much you can invest.

Is it better to buy I bonds now or wait? ›

It's a 'better bet' to buy I bonds now

If you want more I bonds, "it's probably a better bet to buy before the end of April and lock in that higher rate for six months," according to David Enna, founder of Tipswatch.com, a website that tracks Treasury inflation-protected securities, or TIPS, and I bond rates.

Is it smart to buy bonds now? ›

High-quality bond investments remain attractive. With yields on investment-grade-rated1 bonds still near 15-year highs,2 we believe investors should continue to consider intermediate- and longer-term bonds to lock in those high yields.

What bonds to invest in 2024? ›

The American Funds Bond Fund Of America is considered a top pick for 2024 due to its strong historical performance, robust portfolio management and diversified bond holdings.

What are the safest bonds right now? ›

Treasuries. Treasury securities like T-bills and T-notes are very low-risk as they're issued and backed by the U.S. government. They provide a safe way to earn a return, albeit generally lower than aggressive investments.

Which bonds are the best investment Why? ›

U.S. Treasury bonds

Also known as treasuries, these are bonds issued by the U.S. treasury and sold to investors as a way to fund government spending. These are considered safer, low-risk investments because they are fully backed by the U.S. government.

What is the 3 month Treasury bill rate? ›

3 Month Treasury Bill Rate is at 5.25%, compared to 5.25% the previous market day and 4.95% last year. This is higher than the long term average of 4.19%. The 3 Month Treasury Bill Rate is the yield received for investing in a government issued treasury security that has a maturity of 3 months.

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