Are corporate bonds a good buy now?
Source: Bloomberg, with data from Standard and Poor's. Rating actions from 1/1/2023 through 11/30/2023. Investment-grade corporate bonds continue to appear attractive, given their relatively high yields and low to moderate credit risk. There are risks, however, if the economy slows and spreads rise.
Our base case outlook is for a low-growth or mild recession in 2024 stemming from the persistent drag of tight monetary policy during the last two years and the potential for fiscal policy to turn from a tailwind to a headwind.
High-quality bond investments remain attractive. With yields on investment-grade-rated1 bonds still near 15-year highs,2 we believe investors should continue to consider intermediate- and longer-term bonds to lock in those high yields.
Vanguard's active fixed income team believes emerging markets (EM) bonds could outperform much of the rest of the fixed income market in 2024 because of the likelihood of declining global interest rates, the current yield premium over U.S. investment-grade bonds, and a longer duration profile than U.S. high yield.
Government bonds are a good option if you're looking for stable domestic or international investments, while corporate bonds may suit you if you want to take a bit more risk in exchange for higher potential growth.
NEW YORK, Dec 29 (Reuters) - As bonds emerge from a historic selloff, some investors expect better times in the U.S. fixed income market next year - as long as the Federal Reserve's rate cuts play out as anticipated.
Investor takeaway: Investors looking to earn higher yields without taking too much additional risk should consider investment-grade corporate bonds. While slower economic growth does pose a risk to the market, we expect their prices to hold up better than the prices of high-yield bonds should growth slow.
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.
Unless you are set on holding your bonds until maturity despite the upcoming availability of more lucrative options, a looming interest rate hike should be a clear sell signal.
If sold prior to maturity, market price may be higher or lower than what you paid for the bond, leading to a capital gain or loss. If bought and held to maturity investor is not affected by market risk.
What happens to bonds when interest rates fall?
Bond prices have an inverse relationship with interest rates. This means that when interest rates go up, bond prices go down and when interest rates go down, bond prices go up.
Interest rates have held steady since July 2023.
The Fed raised the rate 11 times between March 2022 and July 2023 to combat ongoing inflation. After its December 2023 meeting, the Federal Open Market Committee (FOMC) predicted making three quarter-point cuts by the end of 2024 to lower the federal funds rate to 4.6%.
The March 2024 12-month I Bond rate of 5.27% is similar to CDs and Treasury Bills that are roughly 5% interest over the same time frame. Also consider the 3-month recent interest penalty if you cash out in the first 5 years.
Are bonds a good investment during a recession? Yes, bonds are generally considered a good investment during a recession due to their relative stability and predictable income stream.
Similar to government bonds, corporate bonds are exposed to interest rate risk. In addition, corporate bonds also have credit or default risk - the risk that the borrower fails to repay the loan and defaults on its obligation.
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.
U.S. stock returns: 2023 optimism carries forward
This heightened optimism is on par with the positive outlook in December 2021, when investors anticipated a 6% stock market return for 2022. Investor expectations for stock returns over the long run (defined as the next 10 years) rose slightly to 7.2%.
Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price.
"Short-term bonds could be a safer bet in 2024, offering lower interest rate risk compared to long-term bonds," says Kovar. "They provide a relatively stable income stream with less exposure to market volatility."
- Fixed payment. ...
- May be riskier than government debt. ...
- Low chance of capital appreciation. ...
- Price fluctuations (unlike CDs). ...
- Not insured (unlike CDs). ...
- Bonds need analysis. ...
- Exposed to rising interest rates.
Which is better corporate bonds or stocks?
Given the numerous reasons a company's business can decline, stocks are typically riskier than bonds. However, with that higher risk can come higher returns. The market's average annual return is about 10%, not accounting for inflation.
A key difference is credit ratings - government bonds have essentially no risk of default, reflected by AAA/Aaa ratings. Corporate bonds' credit ratings range from investment grade to junk status, indicating higher chances of default. Investors must evaluate if higher yields justify additional credit risk.
| Face Value | Purchase Amount | 30-Year Value (Purchased May 1990) |
|---|---|---|
| $50 Bond | $100 | $207.36 |
| $100 Bond | $200 | $414.72 |
| $500 Bond | $400 | $1,036.80 |
| $1,000 Bond | $800 | $2,073.60 |
- Vanguard Core-Plus Bond ETF (VPLS)
- iShares MBS ETF (MBB)
- Invesco Ultra Short Duration ETF (GSY)
- SPDR Bloomberg 1-3 Month T-Bill ETF (BIL)
- iShares Aaa – A Rated Corporate Bond ETF (QLTA)
- Schwab Short-Term U.S. Treasury ETF (SCHO)
- Schwab Intermediate-Term U.S. Treasury ETF (SCHR)
- Schwab Long-Term U.S. Treasury ETF (SCHQ)
Range: 4.94 to 5.02.
