November Rally Should Help Bring Investors Back to Bonds

The recent rate pause by the Federal Reserve is bringing optimism to the capital markets that interest rates may finally head lower. In turn, it’s pushing yields down. Conversely, bond prices rallied in November, which should help bring investors back to the market.

As reported by the Financial Times, November resulted in the best month for bonds in almost 40 years, as the stock market is also rallying alongside the bond market. In the past few years, investors used bonds as a safe haven move in the event that a recession would result from the Fed’s tight monetary policy.

Lately, however, the recent shift should could be leaning toward continued bullishness in bond prices as the prospect of lower interest rates increases. As the FT report noted, the rally “has sent benchmark 10-year US government bond yields down from 5 per cent in mid-October to just 4.3 per cent or so now.”

“We’re not going to see 5 per cent on the US 10-year again,” said Karen Ward, chief market strategist for Europe at JPMorgan Asset Management. “If you missed 5, don’t miss 4.5. Bonds are very high on the Christmas wishlist in my house.”

FT also reiterated that the higher-for-longer narrative in interest rates is fading into the background. Additionally, the anticipation is that rate cuts could come as early as spring 2024, which will be a wait-and-see situation.

Access Aggregate Bond Exposure

Investors who share the same bullish sentiment for the bond market can opt for single debt issues or an aggregate option via exchange-traded funds. For the latter, consider the Vanguard Total Bond Market Index Fund ETF Shares (BND), which carries a low 0.05% expense ratio.

BND seeks the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index. That index represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the U.S., including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than one year.

Because BND offers aggregate exposure, bond investors can use the ETF as a traditional hedging component when the equities market goes awry in, for example, a traditional 60/40 stock-bond portfolio. Short-term traders can also use the ETF given its dynamic ability to be bought and sold quickly in the open market versus individual bond holdings.

For more news, information, and strategy, visit the Fixed Income Channel.