Bond Rallied as 2023 Drew to a Close. What to Expect in 2024.

TLT spent most of last year languishing in negative territory—in early October the fund was down nearly 15% on a total return basis. But late October marked the start of “one of the most aggressive rallies” in markets over the last few decades, with “massive” returns across assets into year-end turning bond losses into gains, according to Deutsche Bank Research.

In December, TLT delivered total returns of 8.67%, and for the fourt quarter, it was up 12.93% on a total return basis. It ended the year up 2.77%, but is down 0.6% this year.

Meanwhile, the yield on the 10-year note—the benchmark for borrowing costs globally—briefly crossed the 4% level on Wednesday ahead of the release of the Federal Reserve’s meeting minutes. The yield last traded above the 4% threshold on Dec. 13. Since then yields have fallen as expectations of a rate cut this year have solidified. The 10-year note settled at 3.905% on Wednesday.

Bond yields and prices move in opposite directions.

“We had that quick ride from 5% down to the current 3.9% or so on the 10-year, which gave you a pretty good return. Now what?,” said Daniel Wiener, founder and former CEO of RWA Wealth Partners. 

“I can’t see yields falling that much further so the recent bull market in bonds may be over,” he added. “People forget that we had a 40-plus year bull run for bonds from the early 1980s. That’s not happening again. Not unless inflation goes through the roof.”

Others are more sanguine on bonds, including Alliance Bernstein and Vanguard, the world’s second-largest asset manager.

“Despite Treasuries’ recent rally, yields remain very compelling, with the U.S. 10-year Treasury now yielding 3.9%,” said Alliance Bernstein in its fixed-income outlook for 2024.

The firm said inflation, while declining, is still well above the Federal Reserve’s target, and it expects rates to remain elevated into the second half of 2024. Given current trends in economic data, Alliance Bernstein thinks the Fed has completed its rate-hiking cycle and will remain on pause until inflation is closer to 2%, when it can begin to ease in the face of cooling U.S. growth. 

“For bond investors, these conditions are nearly ideal,” the report said. “After all, most of a bond’s return over time comes from its yield. And falling yields—which we expect in the latter half of 2024—boost bond prices. Investors should consider extending duration in this environment to gain exposure to rates.”

In a note Wednesday, Vanguard said that thanks to higher interest rates, “bonds are back.”

“Short-term pain can lead to long-term gain,” the firm said. “Bond investors should keep that adage in mind, having endured two years of negative total returns because of rising interest rates. But higher interest payments offset declines in bond prices, raising expected total returns over the long term. Reinvestments and new money going into fixed income are attractively valued.”

But, it cautioned, “this doesn’t mean volatility is behind us.”

Bond investors will need to buckle up for the ride. 

Write to Lauren Foster at [email protected]