Q: What’s predicted to happen with bonds in 2024—and should I reconsider my fixed income strategy?
Bonds are a debt vehicle issued by governments and corporations when they want to raise money. When you purchase a bond, you’re essentially giving the issuer a loan. The interest rate you receive as the bondholder, usually set at the time of purchase, serves as fixed income over the life of the bond.
As we’re all aware, the Federal Reserve raised interest rates in 2022 and 2023. This was quite the change from the nearly-zero-rate environment we’d all become accustomed to after the global financial crisis. Interest rates and bond prices move in opposite directions. So, the lower-rate environment helped bond prices stay high but did not provide bond buyers with much in terms of interest rates. When rates rise, new bonds are issued at higher interest rates, which makes them more desirable than bonds with lower rates. As a result, existing bonds drop in price.
We haven’t experienced this scenario in quite some time. If you hold certain types of bonds, they could create issues for your portfolio. Higher quality, shorter-maturity bonds won’t be as affected as bonds with longer maturities or lower credit ratings. For our clients, we typically purchase high-quality investment-grade bonds to alleviate the risk of default or volatility, making it possible to hold the bonds to maturity. At maturity, our clients then receive the principal and interest.
Now as we move through 2024, the Federal Reserve has discussed cutting interest rates since inflation has come down to a more comfortable level. This will create a scenario opposite of what we saw in 2022 and 2023: We’ll most likely see the prices of bonds in the marketplace increase, especially those with higher rates. Though the Federal Reserve’s rate-cut schedule will be data dependent and bound to change throughout 2024, it’s safe to assume bonds will be interesting to watch over the next couple years.
Even though we’re in the middle of a changing interest rate environment, our philosophy at Rodgers & Associates remains the same. We’d encourage you to own a “ladder” of high-quality investment-grade bonds that reach maturity at staggered times. This laddering effect helps create predictable streams of income, can reduce exposure to volatility in the stock market, and can help to manage potential risk from changing interest rates.
