Bonds Should Climb Nicely in 2024, WTW Predicts

Dropping central bank rates will help a lot, with the 10-year Treasury total return rising as much as 13%, the firm contends. 

Rising interest rates and international tensions have whipsawed capital markets in recent years, but this year, look for a return to normalcy. Markets should benefit from falling rates, a tonic for bonds in particular, according to a report from consulting firm WTW.

“We expect nominal and real yields to fall over 2024, as central banks cut policy rates as inflation falls and/or if downside growth risks rise,” the WTW Global Investment Outlook 2024 stated. The firm pointed to government bonds as the largest beneficiaries, as they are risk-free. Alongside that, bond volatility should keep on receding this year: The ICE BofAML MOVE Index, which measures fixed-income volatility, is down by half from its March 2023 high.

A one percentage point decline in interest rates would mean a 13.6% rise in total returns (yield plus prices, which go up when rates go down) for the benchmark 10-year Treasury bond, WTW calculated. Lower rates should spur an outflow from cash—notably money market funds—and into bonds, the report predicted. That buying pattern, in turn, would lead to upward pressure on bond prices.

Both stocks and bonds turned in pretty good years in 2023, with the S&P 500 up about 26% from the year before and the Bloomberg Barclays Bond Index ahead almost 6%, both largely the result of retreating inflation and expected lower interest rates.

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In WTW’s view, inflation should continue to drop and the economy should grow steadily this year, albeit not at a rapid pace. The U.S. gross domestic product for 2023 came in at 3.3%, an improvement over 2022, when GDP was diminished by the onset of the Federal Reserve’s tightening regime.

On the equity side, WTW predicted that new equity-market leaders would emerge, and the Magnificent Seven tech stocks may no longer be the prime drivers. Artificial intelligence could spread the bounty to numerous other stocks than the Mag Seven, the report surmised.

As a result, strong earnings may also be more widespread, in WTW’s estimate. S&P 500 earnings flagged for 2023’s first half. FactSet Research predicted that fourth-quarter S&P 500 profits will increase 3.2%, marking just the second consecutive quarterly increase.

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