With the S&P 500 Index up double-digits over the past year, it can be tempting for investors to ignore bonds. Compared to the stock market, it’s hard to get excited about a 5% yield on an investment-grade corporate bond or a U.S. Treasury bond. And these yields appear to be good news for bonds. Besides yields, the other part of a bond’s total return is its price, and as of April 8, 2024, bond prices represented by the Bloomberg US Aggregate Bond Index are lower than they were a year ago. year.
So why does Jeff Moore, director of Fidelity® Is Investment-Grade Bond Fund (FBNDX) saying it “feels better than it has in years about the outlook for bonds”?
Moore’s optimism comes from the fact that it is possible to buy high-quality bonds with yields higher than they have been in years at prices still low enough to offer appreciation potential long-term capital. “As yields have risen, this asset class has become the most attractive in a long time,” he says. “Just two years ago, the average yield of the Bloomberg US Aggregate Bond Index, known as ‘agg,’ which reflects the broadest aggregate measure of the US bond market, yielded just 1.42 %. Now the aggregate has an average yield of 5%, investment grade bonds with intermediate maturity have an average yield of 5.35% and longer maturities offer an average yield of 5.65%.
Moore says these high yields are not only a good source of income, but they can also increase the attractiveness of bonds that are more sensitive to possible future changes in interest rates. To understand how sensitive a bond may be to interest rate risk, experienced investment managers look at a metric known as bond duration. Investing in shorter duration bonds can be a way to help reduce the interest rate risk faced by the bond portion of your portfolio. But Moore says today’s high yields make duration less of a concern. “The more return you can put into the portfolio – without taking excessive risk, of course – the greater the return potential, regardless of what may happen with rates,” he says. By helping to reduce the risks associated with longer duration bonds, the higher yields help create more potential opportunities for potential bond buyers.
With the S&P 500 Index up double-digits over the past year, it can be tempting for investors to ignore bonds. Compared to the stock market, it’s hard to get excited about a 5% yield on an investment-grade corporate bond or a U.S. Treasury bond. And these yields appear to be good news for bonds. Besides yields, the other part of a bond’s total return is its price, and as of April 8, 2024, bond prices represented by the Bloomberg US Aggregate Bond Index are lower than they were a year ago. year.
So why does Jeff Moore, director of Fidelity® Is Investment-Grade Bond Fund (FBNDX) saying it “feels better than it has in years about the outlook for bonds”?
Moore’s optimism comes from the fact that it is possible to buy high-quality bonds with yields higher than they have been in years at prices still low enough to offer appreciation potential long-term capital. “As yields have risen, this asset class has become the most attractive in a long time,” he says. “Just two years ago, the average yield of the Bloomberg US Aggregate Bond Index, known as ‘agg,’ which reflects the broadest aggregate measure of the US bond market, yielded just 1.42 %. Now the aggregate has an average yield of 5%, investment grade bonds with intermediate maturity have an average yield of 5.35% and longer maturities offer an average yield of 5.65%.
Moore says these high yields are not only a good source of income, but they can also increase the attractiveness of bonds that are more sensitive to possible future changes in interest rates. To understand how sensitive a bond may be to interest rate risk, experienced investment managers look at a metric known as bond duration. Investing in shorter duration bonds can be a way to help reduce the interest rate risk faced by the bond portion of your portfolio. But Moore says today’s high yields make duration less of a concern. “The more return you can put into the portfolio – without taking excessive risk, of course – the greater the return potential, regardless of what may happen with rates,” he says. By helping to reduce the risks associated with longer duration bonds, the higher yields help create more potential opportunities for potential bond buyers.