Bond markets are caught in a variety of crosswinds.
Published April 25 2023
Question: What challenges are bond markets facing?
R.J. Gallo: The bond markets are caught in a variety of crosswinds. On the one hand, the impact of the Fed's tightening clearly is leading to a slower economy. Recent stresses in the banking system are supporting that trajectory. On the other hand, inflation is still too high. In addition, we have significant event risk coming up likely this summer, maybe early fall with respect to the debt ceiling. So, there are a variety of countervailing forces affecting the bond market, which is why it's gotten pretty choppy. I think what's most important to note is relative to the yield levels we saw in the fall of last year, at one point the 10-year treasury hit 4.25%, a little higher actually. We're now around 3.50%. The market is adapting to the pattern of news as it comes out, the banking stress being the most recent series of events. But as inflation comes down, the economy slows, we think bond investors should be pretty comfortable owning fixed income within their diversified portfolios. We are not apt for a repeat of the disastrous returns of 2022, and we think high quality fixed-income portfolios are apt to give you reasonable total returns, and positive total returns in 2023.