Good news for conservative investors: the worst may be almost over for bonds
It also means that mortgage rates, which have edged up almost 6% for a 30-year fixed loan, could pull back, especially if the Fed doesn’t have to keep raising rates so dramatically.
“It’s been painful for fixed income as bonds haven’t provided the portfolio protection that investors value,” said Chip Hughey, managing director of fixed income at Truist Advisory Services.
“But there is the perception that the Federal Reserve may have had to overtighten,” Hughey added. “This standoff could put downward pressure on yields.”
Is the bond market doing Powell’s job for him?
Lately, anyone with bonds or fixed-income exchange-traded funds that track Treasuries has been hurt — and the idea of Treasuries as a safe haven has been turned upside down. But the good news about soaring bond yields is that fixed-income investors may already be doing a lot of the dirty work for Fed Chairman Jerome Powell, experts say.
“Interestingly, the bond market sniffed out trouble and responded to Fed auctions, driving bond prices down and yields up,” said Nancy Tengler, chief investment officer and CEO of Laffer Tengler Investments on Monday. .
“We’ve passed the peak of inflationary panic after the last CPI report. Investors can now feel more secure in bonds. We’re close to capitulation,” said Matt Smith, chief investment officer at Ruffer.
Granted, yields could climb a little further before finally suffering a significant downturn. But the worst is probably over. Experts predict a more gradual increase from current levels, not another doubling.
“Most of the damage in the bond market could be done,” said Steve Wyett, chief investment strategist at BOK Financial.
Wyett thinks the 10-year yield could peak around 3.5% later this year before starting to decline as inflation numbers head “a bit lower” in the fourth quarter.
“It’s hard to say when we’ll have a sharp turnaround. This year’s performance has been pretty bad,” said Henry Song, portfolio manager at Diamond Hill. “But it’s a much more attractive entry point for bonds now, even if it’s not the bottom. There’s a lot of upside potential.”