Is January 2024 a good time to buy bonds?
While equity and bond market volatility could persist in the short run, sentiment has improved measurably in 2024. Indeed, with the cooling of inflationary pressure across the US & global economies, we expect to see a continued pause in central bank monetary policy tightening.
Starting yields, potential rate cuts and a return to contrasting performance for stocks and bonds could mean an attractive environment for fixed income in 2024.
The worst-case scenario for purchases in March 2024 is you earn 5.27% interest for the 6 months after you buy your I bond, followed by 0%. While unlikely (it's only happened twice out of 52 inflation rate resets), it is possible that inflation is negative, which could cause your next 6-month renewal rate to be 0%.
In 2024, there is promising opportunity for positive performance. The expectation is that more cash from these outflows will return to tax-exempt bonds, presenting opportunities for investors as market conditions improve.
The top picks for 2024, chosen for their stability, income potential and expert management, include Dodge & Cox Income Fund (DODIX), iShares Core U.S. Aggregate Bond ETF (AGG), Vanguard Total Bond Market ETF (BND), Pimco Long Duration Total Return (PLRIX), and American Funds Bond Fund of America (ABNFX).
The market sees a greater than 80% chance of at least five rate cuts from current levels by the end of 2024. Investor optimism about the economic outlook has improved dramatically from a year ago, but there's still a risk that Fed policy tightening could tip the economy into a recession in 2024.
Wall Street analysts' consensus estimates predict 3.6% earnings growth and 3.5% revenue growth for S&P 500 companies in the first quarter. Analysts project full-year S&P 500 earnings growth of 11.0% in 2024, but analysts are more optimistic about some market sectors than others.
For example, the earnings rate announced on May 1 reflects an inflation rate from the previous October through March. Question: Will the value of a Series I bond decrease during periods of deflation, when the CPI-U declines? Answer: No. In periods of deflation, the bond's redemption value won't decline.
That rate is currently set at 3.94%, annualized, for six months. It will adjust again on May 1, 2024, rolling into effect for all I Bonds, no matter when they were purchased. The current composite rate is 5.27% annualized for six months for purchases through April 2024.
| Face Value | Purchase Amount | 20-Year Value (Purchased May 2000) |
|---|---|---|
| $50 Bond | $100 | $109.52 |
| $100 Bond | $200 | $219.04 |
| $500 Bond | $400 | $547.60 |
| $1,000 Bond | $800 | $1,095.20 |
Is now a good time to invest in municipal bonds?
Like most other fixed income investments, municipal bond yields have risen significantly since late 2021 and are now at levels that largely haven't been reached during the past decade.
Still, some leading investment managers and analysts suggest it's time for investors to come back home to municipal bonds. "After two tumultuous years, we expect a municipal market recovery in 2024," says Robert DiMella, executive managing director, co-head of MacKay Municipal Managers.
Municipal bonds generally carry less risk than stocks and are tax-exempt, which for higher tax-bracket investors effectively increases the return rate. It's crucial to highlight though, that they may not be the best choice for everyone and should be considered in light of personal financial circ*mstances.
| Rank | Fund | Yield |
|---|---|---|
| 1 | Vanguard High-Yield Corporate Fund Investor Shares (VWEHX) | 6.40% |
| 2 | T. Rowe Price High Yield Fund (PRHYX) | 7.02% |
| 3 | PGIM High Yield Fund Class A (PBHAX) | 7.22% |
| 4 | Fidelity Capital & Income Fund (fa*gIX) | 6.16% |
| ETF | Expense ratio | Yield to maturity |
|---|---|---|
| iShares Aaa – A Rated Corporate Bond ETF (QLTA) | 0.15% | 5% |
| Schwab Short-Term U.S. Treasury ETF (SCHO) | 0.03% | 4.3% |
| Schwab Intermediate-Term U.S. Treasury ETF (SCHR) | 0.03% | 3.9% |
| Schwab Long-Term U.S. Treasury ETF (SCHQ) | 0.03% | 4.1% |
- The best bond ETFs.
- Vanguard Total Bond Market ETF (BND)
- Vanguard Total International Bond ETF (BNDX)
- iShares Core U.S. Aggregate Bond ETF (AGG)
- iShares Core Total USD Bond Market ETF (IUSB)
- Schwab U.S. Aggregate Bond ETF (SCHZ)
- SPDR Portfolio Aggregate Bond ETF (SPAB)
After a spectacular 2023, stocks are off to the races again in 2024. YTD, the Dow is up 2.72%, the S&P is up 7.28%, and the Nasdaq is up 6.41%. (And that's on top of last year's 13.7%, 24.2%, and 43.4% respectively.)
A forward-looking measure of the U.S. economy continued to decline in January but importantly it is no longer signaling a recession in 2024, reflecting an economy outperforming expectations.
Analysts polled by FactSet expect S&P 500 earnings to grow by more than 10% for all of 2024. In another positive sign for markets, history suggests that new highs at the beginning of the year often portend positive annual returns.
We tell you how these different asset classes are likely to perform in 2024 and how you should adjust your investment exposure to these assets. The equity market is known to deliver one of the highest returns among various asset classes in the long run and this is not going to change much in 2024.
Is it better to buy bonds when inflation is high?
Inflation is a bond's worst enemy. Inflation erodes the purchasing power of a bond's future cash flows. Typically, bonds are fixed-rate investments. If inflation is increasing (or rising prices), the return on a bond is reduced in real terms, meaning adjusted for inflation.
A rise in either interest rates or the inflation rate will tend to cause bond prices to drop. Inflation and interest rates behave similarly to bond yields, moving in the opposite direction from bond prices. The reason has to do with the relative value of the interest that a specific bond pays.
Should I only buy bonds when interest rates are high? There are advantages to purchasing bonds after interest rates have risen. Along with generating a larger income stream, such bonds may be subject to less interest rate risk, as there may be a reduced chance of rates moving significantly higher from current levels.
The cons of investing in I-bonds
There's actually a limit on how much you can invest in I-bonds per year. The annual maximum in purchases is $10,000 worth of electronic I-bonds, although in some cases, you may be able to purchase an additional $5,000 worth of paper I-bonds using your tax refund.
Interest on I bonds is exempt from state and local taxes but taxed at the federal level at ordinary income-tax rates.
