Download the 12.20.23 Dynamic Bond Market Update for advisors’ use with clients

 

Strong Year-End for Bonds

Yields continued to decline this month, gifting bond investors one of the strongest year-end rallies since the early 1980s. While most major fixed income indices are positive on the year, high yield and investment grade corporate returns have been particularly strong and are the only indices in the “YTD Total Return” chart below that have outperformed their average annualized total return since inception. With just under two weeks remaining in 2023, fixed income sentiment remains high, and any lingering fears of a third consecutive year of poor bond performance have diminished.

 

Source: ICE BofA Indexes, Bloomberg. Past performance is no guarantee of future results.

The Yield Window is Still Open

Despite a significant decline over the last two months, fixed income yields are relatively unchanged in 2023 and remain near decade highs. Importantly, many of the factors that initially drove rates higher, including elevated inflation and interest rate uncertainty, have eased considerably. Year-over-year Consumer Price Index (CPI), for instance, has dropped from 6.40% to 3.10%, while expectations that rate cuts may be on the horizon have increased dramatically. The Fed’s “Dot Plot” now calls for three interest rate cuts in 2024, while Bloomberg’s interest rate probability model now estimates at least five.

 

Source: ICE BofA Indexes, Bloomberg. Past performance is no guarantee of future results.

Short Rates Remain Attractive but Can Decline Quickly

One of the best performing bond strategies of 2023 was to stay short. Not only did this reduce volatility, but also the inverted nature of most fixed income yield curves meant shorter bonds yielded more than long. While it may seem tempting to replicate this strategy in 2024, as most yield curves remain inverted, we believe a more diversified approach to maturity selection is prudent. Short maturities carry the highest reinvestment risk, and tend to track the Federal Funds rate closely, as demonstrated in the “Short Treasury Yields vs. Federal Funds Rate” chart below. With both the Fed and futures market telegraphing potential rate cuts in 2024, the yields available today might not be here tomorrow.

Source: Bloomberg. Past performance is no guarantee of future results.

A prudent approach to fixed income investing calls for diversification across both credit and duration exposure. As always, Dynamic recommends staying balanced, diversified and invested. Despite short-term market pullbacks, it’s more important than ever to focus on the long-term, improving the chances for investors to reach their goals.

Should you need help navigating fixed income for your clients, please contact Dynamic’s Investment Management team at (877) 257-3840, ext. 4 or investmentmanagement@dynamicadvisorsolutions.com.

Bill Smith serves as president, Portfolio Management & Trading, of Harmont Fixed Income in Phoenix.

Disclosures

This commentary is provided for informational and educational purposes only. The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. This is not intended to be used as a general guide to investing, or as a source of any specific recommendation, and it makes no implied or expressed recommendations concerning the manner in which clients’ accounts should or would be handled, as appropriate strategies depend on the client’s specific objectives.

This commentary is not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation. Investors should not assume that investments in any security, asset class, sector, market, or strategy discussed herein will be profitable and no representations are made that clients will be able to achieve a certain level of performance, or avoid loss.

All investments carry a certain risk and there is no assurance that an investment will provide positive performance over any period of time. Information obtained from third party resources are believed to be reliable but not guaranteed as to its accuracy or reliability. These materials do not purport to contain all the relevant information that investors may wish to consider in making investment decisions and is not intended to be a substitute for exercising independent judgment. Any statements regarding future events constitute only subjective views or beliefs, are not guarantees or projections of performance, should not be relied on, are subject to change due to a variety of factors, including fluctuating market conditions, and involve inherent risks and uncertainties, both general and specific, many of which cannot be predicted or quantified and are beyond our control. Future results could differ materially and no assurance is given that these statements or assumptions are now or will prove to be accurate or complete in any way.

Past performance is not a guarantee or a reliable indicator of future results. Investing in the markets is subject to certain risks including market, interest rate, issuer, credit and inflation risk; investments may be worth more or less than the original cost when redeemed.

Investment advisory services are offered through Dynamic Advisor Solutions, LLC, dba Dynamic Wealth Advisors, an SEC registered investment advisor.

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