August 4, 2022
  • August 4, 2022

Good news for conservative investors: the worst may be almost over for bonds

By on June 27, 2022 0
This drop in bonds is bad news for conservative investors, retirees living on fixed incomes and anyone trying to buy a home. But the worst may be over.
Mortgage rates have skyrocketed with bond yields, because rates rise as bond prices fall. And bonds have fallen this year: the benchmark 10-year US Treasury yield has more than doubled in 2022, from around 1.51% at the end of last year to 3.16% currently.
The main reason for the surge in bond yields: aggressive interest rate hikes by the Federal Reserve and expectations of more to come. But now experts think the bond market may be pricing in the likelihood that Fed rate hikes will dampen inflation. This means that yields could soon start to pull back.

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. .

Others point out that inflation, which hit a year-on-year rate of 8.6% through May according to the latest consumer price index report, is likely on the verge of to finally reach a peak. This should also lower bond yields.

“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.

That would be music to the ears of investors who own bonds because they don’t want to take on the risks associated with meme stocks, bitcoin and other more speculative assets.

“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.”