Fixed Income Viewpoints: Outlook for Bonds: Riding the Crest

The Viewpoints series gives investors Lazard’s perspectives on the latest macroeconomic and fixed income news and trends. In this edition, Lazard Asset Management's fixed income team ponder what a falling interest-rate environment in 2024 may portend for the bond market.

A bond investor who took a sabbatical in 2023 could perhaps be forgiven for thinking that not much had happened. On the last trading day of December, the benchmark 10-year U.S. Treasury bond yield was literally unchanged from a year earlier at 3.88%.

Appearances can be deceiving, though. Our bond investor would have missed the best market performance since 2020 and the highest market volatility in years. Amid central bank interest-rate hikes and pauses, a U.S. banking crisis, falling inflation globally, stalling growth in Europe, and resilience in the United States, the 10-year U.S. Treasury yield swung to 3.30% in the spring and to 5% in October — its highest level in 15 years. A stunning two-month rally then closed out the year. The result: The Bloomberg Global Aggregate Bond Index gained some 9% over November and December alone, turning the tide for fixed income and leading to a total return of 5.7% in 2023.

After such a dramatic performance, what lies ahead for bonds in 2024?

A falling rate environment generally bodes well for bonds, and many central banks — in the United States, Europe, and emerging markets — look likely to cut interest rates in 2024, judging by declining inflation rates over 2023 and the banks’ own forecasts.

But as Lazard’s fixed income professionals discussed at their meeting this month, the interest rate picture is more complicated than that. The bond rally late last year already drove the U.S. 10-year yield down by 100 bps as many investors anticipated central bank easing — pricing in up to six Federal Reserve cuts for 2024 — as well as a soft landing for the U.S. economy.

Click here to read the January issue of Fixed Income Viewpoints.