Investors still have ample opportunities to acquire discounted bonds issued by prominent corporations amidst the current market conditions.
According to data from BondCliQ, over 80% of the U.S. investment-grade bond market was trading at a discount on Wednesday, with prices below $100. This marks a decrease from the peak of 92% observed in October when the 10-year Treasury yield climbed to 5%.
Despite this, the allure of money-market funds and other cash-like investments offering 5% interest remains strong, deterring some investors from fully embracing the bond market. Brendan Murphy, Head of Fixed Income, North America at Insight Investment, noted that while investors are attracted to the absolute yield of bonds, the prevailing 5% cash rate contributes to hesitation among investors.
Moreover, bonds have been affected by ongoing volatility in the Treasury market. The benchmark Aggregate index is on track for a negative return of 1.55% for the year so far, despite a 1% increase from the previous year, as per FactSet data.
Murphy anticipates that eventual rate cuts by the Federal Reserve will bring investors closer to earning a 4% return on cash, potentially prompting a shift from money-market funds to longer-duration risk assets.
Regarding Fed rate expectations, Murphy's team anticipates a rate cut in June, followed by cuts at alternate meetings throughout the year, totaling 75 basis points of easing. They foresee the Fed ultimately reaching a terminal rate in the mid-3% range.
Rate cuts can enhance the attractiveness of bonds issued at higher yields in the future. The Fed indicated the possibility of reducing rates to a 2.6% "neutral" range, aiming to neither stimulate nor depress economic activity.
Despite recent sticky inflation data, the Fed maintained its policy rate steady at a 22-year high, within a range of 5.25% to 5.5%, and kept unchanged its forecast for three rate cuts for the year.
Christian Hoffmann, a portfolio manager at Thornburg Investment Management, highlighted the ongoing dilemma faced by fixed income investments, balancing expectations for lower rates, favorable for bonds, against increased tolerance for inflation, detrimental for bonds.
Although the 10-year Treasury yield fell to 4.271% on Wednesday, it remains approximately 41 basis points higher year-on-year. Bonds are typically priced at a premium above the relevant risk-free Treasury rate to offset credit risks.
Murphy noted a decline in distressed investment-grade corporate bonds, priced between $50 to $80, since October, indicating reduced concerns about corporate defaults.
He described a backdrop of gradual rate cuts as a "sweet spot" for fixed income, despite anticipated volatility. Amidst market fluctuations, he emphasized the importance of seizing buying opportunities presented by yield increases.
On Thursday, all three major U.S. stock indexes recorded gains, following record highs in the previous session. The Dow Jones Industrial Average rose by 0.9%, the S&P 500 index increased by 0.7%, and the Nasdaq Composite Index advanced by 0.7%.
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