How have bonds performed in the year since the Fed’s first interest rate cut?
A strong rally in the U.S. bond market in the fourth quarter could give the Federal Reserve more room to cut interest rates, even if it takes time, according to Janus Henderson Investors.
Late last year, Federal Reserve Chairman Jerome Powell announced plans to move to lower interest rates in 2024. That pushed the benchmark 10-year Treasury yield down more than 1% from the 16-year high of 5% it reached in October.
Falling benchmark rates also helped boost the broader bond market, including the closely followed Bloomberg US Aggregate Bond Index AGG.,
Or, according to Janus Henderson, “AGG” books a profit of 5.5%. AGG fell 13% in 2022 as the impact of the Federal Reserve’s interest rate hike rippled through the market.
U.S. stocks fell sharply during the week as the January consumer price index showed inflation still has a long way to go before returning to the Federal Reserve’s 2% annual target, which could delay a rate cut.
But for investors in “cash” investments, which yield about 5%, the bond turnaround in late 2023 could be a reminder of the potential downside of sitting on the sidelines for too long.
Looking at the Fed’s past interest rate cut cycles since the 1990s, we can see the average yield on Treasury bonds or Treasury bonds that mature within one year. BX:TMUBMUSD01M BX:TMUBMUSD03M BX:TMUBMUSD06M,
According to Janus Henderson, the rate one year after the first rate cut was 3.65%. This compares to an average yield of 6.85% for agency mortgage-backed securities.
Holding on to cash while the Federal Reserve cuts interest rates could mean missing out on attractive yields from bonds, says Janus Henderson Investors.
Data from Janus Henderson Investors, Morningstar, and Bloomberg as of December 31, 2023.
Assets in money market funds fell slightly from record territory last week, holding about $6 trillion in assets as of Feb. 14, according to data from the Investment Company Institute.
“It’s not market timing, it’s time in the market,” portfolio manager Janus Henderson wrote in this week’s market outlook. “Even though yields are higher today, money market yields and yields will fall once the Fed starts cutting interest rates.”
Please read: Fed’s Daly said fixing the inflation problem will require patience.
Stocks were mostly headed for weekly gains Friday, despite the Dow Jones Industrial Average DJIA falling more than 500 points on Wednesday. According to FactSet data, the Dow Jones Industrial Average was up 0.4% for the week, the S&P 500 index SPX was up 0.2% for the week, and the Nasdaq composite index was down 0.6% for the week.
