Sand Hill's Chief Investment Officer, Brenda Vingiello, CFA, joins Jenny Harrington on “Halftime Report” to go over their most recent portfolio moves. Brenda's commentary begins
Rates, Rallies and Rational Expectations
Published Date : January 31, 2024
Not to be overshadowed by the strong returns from equity markets last year, bond market investors also have something to celebrate as we turn the page on 2023. After 525 basis points of rate hikes in the past two years, something shifted in 2023, and it shifted fast. The yield on the 10-year Treasury peaked near 5% in October and then staged an impressive rally to end the year close to where it started the year—around 3.9%. In the final quarter of 2023, bond fund performance soared after the Fed’s dovish pivot in December signaled an end to the rate hiking cycle and a nod to interest rate cuts in the year ahead.
Despite elevated bond market volatility throughout the year, markets rewarded investors who stayed on course. The U.S. Aggregate Bond Index finished the year up 5.5%, outperforming 3-month Treasuries by around half a percentage point for the year. It’s a feat that didn’t seem likely heading into October as yields continued to march higher. However, the combination of relatively softer jobs data, lower inflation, and a dovish Fed ignited a rally in bonds that investors had been waiting for. It offered something for everyone as tax-exempt municipal bonds finished the year up 6.4% on average, U.S. credit delivered around 8.5%, and—for those willing to take on additional risk—high-yield and emerging market bonds delivered double-digit returns.
As we think about rational expectations for 2024, we expect a modest reversal in monetary policy to pave the way for lower bond yields and positive outcomes this year, too. Using the December FOMC meeting as a guide, the Fed’s path to a “soft landing” appears to include 0.75% of rate cuts this year as inflation makes its way closer to their 2% target and growth slows without causing a significant rise in unemployment. As of early January, the market was pricing in a more aggressive path to lower interest rates and, in our view, had likely pushed the ‘rate cut narrative’ a little too far given the current benign economic backdrop. Rate cuts are unlikely to come in the first quarter of this year, barring a serious slowdown in economic activity. Instead, we anticipate the Fed Funds Rate will move closer to 4.5% later this year and will continue to remain above pre-pandemic levels.
While current bond yields are off their October peak—a seemingly fleeting moment in time—yields are still significantly higher than where they have been over the past decade. If yields remain stable this year, investors should expect to generate a return in-line with current yields. If we do get interest rate cuts or lower yields, in addition to the income, bond investors will likely experience a positive price return on their bonds, boosting the overall total return. If we’re wrong and interest rates rise, the related price declines should be moderate given the cushion provided by higher starting yields today.
In summary, in our view, the risk-reward profile of the bond market is in a healthy place today. Across the asset class, there is meaningful yield to capture at relatively attractive valuations. While the opportunity set is wide, not all bonds are created equal and it’s important to have a plan given the shift in monetary policy. Investors should consider moving away from cash, locking in relatively higher yields, and maintaining a diversified portfolio of high-quality bonds. And that is our plan of action for the assets that we manage on your behalf.
Articles and Commentary
Information provided in written articles are for informational purposes only and should not be considered investment advice. There is a risk of loss from investments in securities, including the risk of loss of principal. The information contained herein reflects Sand Hill Global Advisors' (“SHGA”) views as of the date of publication. Such views are subject to change at any time without notice due to changes in market or economic conditions and may not necessarily come to pass. SHGA does not provide tax or legal advice. To the extent that any material herein concerns tax or legal matters, such information is not intended to be solely relied upon nor used for the purpose of making tax and/or legal decisions without first seeking independent advice from a tax and/or legal professional. SHGA has obtained the information provided herein from various third party sources believed to be reliable but such information is not guaranteed. Certain links in this site connect to other websites maintained by third parties over whom SHGA has no control. SHGA makes no representations as to the accuracy or any other aspect of information contained in other Web Sites. Any forward looking statements or forecasts are based on assumptions and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. SHGA is not responsible for the consequences of any decisions or actions taken as a result of information provided in this presentation and does not warrant or guarantee the accuracy or completeness of this information. No part of this material may be (i) copied, photocopied, or duplicated in any form, by any means, or (ii) redistributed without the prior written consent of SHGA.
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All video presentations discuss certain investment products and/or securities and are being provided for informational purposes only, and should not be considered, and is not, investment, financial planning, tax or legal advice; nor is it a recommendation to buy or sell any securities. Investing in securities involves varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular client’s financial situation or risk tolerance. Past performance is not a guarantee of future returns. Individual performance results will vary. The opinions expressed in the video reflect Sand Hill Global Advisor’s (“SHGA”) or Brenda Vingiello’s (as applicable) views as of the date of the video. Such views are subject to change at any point without notice. Any comments, opinions, or recommendations made by any host or other guest not affiliated with SHGA in this video do not necessarily reflect the views of SHGA, and non-SHGA persons appearing in this video do not fall under the supervisory purview of SHGA. You should not treat any opinion expressed by SHGA or Ms. Vingiello as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of general opinion. Nothing presented herein is or is intended to constitute investment advice, and no investment decision should be made based solely on any information provided on this video. There is a risk of loss from an investment in securities, including the risk of loss of principal. Neither SHGA nor Ms. Vingiello guarantees any specific outcome or profit. Any forward-looking statements or forecasts contained in the video are based on assumptions and actual results may vary from any such statements or forecasts. SHGA or one of its employees may have a position in the securities discussed and may purchase or sell such securities from time to time. Some of the information in this video has been obtained from third party sources. While SHGA believes such third-party information is reliable, SHGA does not guarantee its accuracy, timeliness or completeness. SHGA encourages you to consult with a professional financial advisor prior to making any investment decision.
Other Posts By This Author
- – Reinvesting Cash on the Sidelines
- – A Steep Bond Market Reset
- – Should You Buy Series I Bonds? What Investors Should Know Before Buying
- – Onward and Upward
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