December 15, 2022

In last week’s newsletter, we introduced our outlook for equities in 2023. We forecasted stocks would find a better balance between the macro environment and business fundamentals in 2023, potentially tilting the scales back toward the bulls (if you missed this email or would like us to resend it, just let me know)

BONDS

2022 will go down as the worst year ever for US Treasury Bonds as well as most corporate and municipal bonds. Typically, we expect Bonds to protect our portfolios during Bear markets when stocks decline. However, the Barclay’s Aggregate bond Index is down approx. -12% year today with some bonds down as much as 16% – equity-like numbers!

However, there is reason to be optimistic as long-awaited income opportunities in the bond market may finally reward Bond holders.

The path of interest rates will certainly be largely influenced by the Fed’s behavior, which will be guided by economic growth and inflation data. Equally important is the level of non-U.S. developed government bond yields, as foreign investors are an important buyer of U.S. Treasuries. Higher foreign market yields, all else equal, generally dissuade foreign investment into our markets. There is a range of scenarios we think could play out over the next year. However, given our view that the U.S. economy could eke out slightly positive economic growth next year, we think 10-year Treasury yields could end the year around 3.5% (about where they are today).

That is very good news after the most volatile year in our history for Treasury Bonds. Better news!  Savers can expect to earn significantly more on their savings accounts, money markets, and CDs. In fact, 1-year and 2-year Treasuries are currently yielding above 4% - that compares to about 1% just 12 months ago.

In addition, because starting yields are the best predictor of future returns over the maturity of a fixed-income instrument, by taking on that additional interest rate risk and owning a full market core bond portfolio, investors would be “locking in” investments at higher yields for a longer period of time. So, for investors with an investment time horizon greater than five years, a full market core bond portfolio may make sense. Otherwise, shorter-maturity securities offer attractive yields as well.

Conclusion

Bond yields may continue to rise while the Fed continues its fight against inflation by continuing to hike interest rates in the first quarter or so of 2023. However, we believe yields on the 10-year treasury will remain unchanged by the end of 2023. For the first time in over a decade, savers will earn a decent return on their savings, and investors with longer time horizons should be able to lock in attractive yields.

Bottom line, after the backup in yields in 2022, there are a number of attractive fixed-income opportunities again.

As always, please do not hesitate to contact me if you have any questions or concerns. We wish you all a safe and prosperous Holiday Season!