Bonds: Safe Haven in Chaotic US Market !
There is no alternative' to stocks - or 'TINA' - is no longer the only force in markets
Goodbye, TINA.
As it turns out, there now is an alternative to stocks.
The bond market has gotten exciting again for investors, after roughly a decade in which the "income" part of fixed income largely was missing.
Higher yields since 2022 have been helping bond portfolios get their mojo back.
The Fed’s expected moves to cut interest rates from roughly a two-decade high have investors scouring for ways to keep meatier bond returns coming in the months, and years, to come.
According to Nuveen, Global Fixed Income, Hd of Fixed income strategy, Tony Rodriquez:
He thinks the curve is going to steepen as the Fed cuts rates this year (2024) and continues cutting gradually throughout 2025.
Specifically, he expects 5% short-term rates, to normalize around the 3% range over time.
US 10-yrs Treasury notes
He is comfortable investing in longer-term 10-year Treasury notes. (see above),
Even though their interest rates (around 3.5% to 4.5%) are already close to what he expects rates to be in the future (between 3.5% and 4.5%).
FYI, the US benchmark borrowing rate was near 4.17% on Thu, 18 Jul 2024.
Bond prices could swing up or down because of uncertainties like (a) volatility in economic data, (b) high borrowing costs, and (c) Jitters surrounding the US election this fall.
Fixed-income can really fill the needs that people expect - in an investment strategy.
He is referring to the generation of income and the balancing out of potential downside risks in an equity portfolio.
In the end, Nuveen sees a roughly 4% yield on the 10-year Treasury as a reasonable longer-term range, given the general expectation that the Fed will eventually returns inflation back to its 2% target.
Realistically, a US economy in soft landing or even in a relatively mild recession, also should allow the Fed to normalize interest rates, but not cut them back to nearly zero, as they were in 2020.
Other Expert’s View:
Janus Henderson Portfolio Manager - Daniel Siluk thinks:
Easing inflation and interest rates bolsters the case for why investors with some $6.4 trillion parked in money-market funds should start reallocating to short-term bonds, particularly Treasury and corporate bonds trading at a discount.
Relatively high-quality bond strategies look ripe to generate 5.5% to 6.5% returns. While aggressive approaches could see 8% and higher returns.
"That is an attractive level of income relative to historical equity-market returns.
Conclusion.
The Fed looks set to implement its first interest rate cut in September 2024 (potentially).
The latest CME Fedwatch tool for a September 2024 interest cut has risen to 94% from 74%, now. (see above)
FYI — The Fed’s policy rate has been kept steady in the 5.25% to 5.5% range since July 2023.
Caution.
With credit spreads tight and the full impact of higher rates still uncertain, Nuveen remains cautious about bonds, especially those in the lowest credit-quality buckets, that tend to be more prone to defaults.
Rodriquez parting notes:
There are times to be aggressive, now is not the time.
For now, it's best to have some cash available (liquidity) because bond prices might change (valuations are tight).
Investors should be ready to jump on good deals (dislocations) if they appear.
My Viewpoints: (mine only)
I think US market in 2025 holds a bleak future, due to political maelstrom that might rage across US should the returning President wins the November 2024 election.
The policies rhetoric the returning President makes will sow discord both domestically and globally.
Look no further than the antics that he is already spewing in his campaign trail.
Look at all the inaccuracy spewed during his campaign trail:
On Crypto. Republicans will end Democrats’ unlawful and un-American Crypto crackdown and oppose the creation of a Central Bank Digital Currency. Republicians, will defend the right to mine Bitcoin, and ensure every American has the right to self-custody of their Digital Assets and transact free from Government Surveillance and Control.”
On Fed Chairman. Verbal abuse and threats about firing Fed Chair - Mr Jerome Powell from the post. When he found out he has no authority over the central bank, he warned against cutting interest rate in September 2024.
On Climate Change. He vowed to end the “Electric vehicle mandate on day one of his return to office in order to save the US auto industry from complete obliteration.
On US leadership on the Global stage. He said Taiwan should pay the US for its defense as it does not give US anything in return.
Refutation.
On Crypto. Does the returning ex-President know how much energy is “wasted” in running cypto-mining machines. By emphasizing a borderless currency acceptance, he is speeding up the demise of the US dollar. When that day arrives, US influence and international standing will be drastically reduced.
On Fed Chairman. The proliferation of fake news will be encouraged by the returning President due to his own penchant for talking without filtering, disseminating a lot of fake news in the process.
On Climate Change. Instead of challenging US auto industry to catch up in vehicles electrification, US will crawl backwards and digress further in Internal Combustion Engine (ICE) manufacturing that no countries in the world will want, in part due to (a) the Copa pact signed, (b) benefits that clean energy promises.
Let’s be clear, there is no EV mandate to begin with.
The mandate that ex-President mentioned was probably the EPA finalized significant exhaust regulations that will save Americans $100 billion dollars in fuel, health and climate costs per year, and save 2,000 lives per year and cut 7 billion tons of climate pollution in total.
The “abolition” of the EV mandate will be a slap across the face for $Tesla Motors(TSLA)$ CEO who has (a) publicly endorsed his support for the returning President and (b) reported that he would donate monthly $45million from July to October 2024.
Perhaps the $180 million donated will exempt Tesla? (pure speculation)
There is hope in Bonds because under the Trump administration, borrowings will fuel national debt to breaking the $40 trillion level in no time.
It is already edging closer to $35 trillion, what’s another $5 trillion right?
Bond Funds / ETFs.
Like equities, if investor is unfamiliar with specific stock pick, Bond funds and ETFs are alternatives. Below are the Top 3 performing bond funds / ETFs for 2024:
$Pimco Total Return ETF(BOND)$. The revised name is Pimco Active Bond ETF. Known for its active management and strong performance in various market conditions.
$Vanguard Intermediate-Term Treasury Index ETF(VGIT)$. Focuses on intermediate-term US Treasury bonds, offering stability and solid returns
$PIMCO Enhanced Short Maturity Active ESG ETF(EMNT)$. Combines short maturity bonds with an ESG focus, providing both performance and sustainability.
Kind of agree with Rodriquez parting notes due to possible political change posing too much unknown in both US equities and bond market. Cash is King, followed by Bond. Sorry stocks !
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