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Fixed Income
Now may be the time for core bonds: Five themes for 2024
Pramod Atluri
Fixed Income Portfolio Manager

With inflation falling and the US Federal Reserve (Fed) signalling an end to its historic tightening cycle, the landscape for bond investors is beginning to look much clearer. Even after a sharp rally in late 2023, yields still look more attractive than they have in a decade.

The Fed’s inflation target is within striking distance and rates could come down quickly if growth continues to cool. The prospects of owning duration appear positive. There are also opportunities in yield curve positioning. Cash equivalents may look less compelling as the Fed lowers interest rates, directly reducing its return potential while also creating strong demand for bonds that should bolster returns for that asset class.

Near-term inflation data shows Fed target is within reach

6-month average month-over-month (seasonally adjusted) (%)

Near-term inflation data shows Fed target is within reach

As at 22 December 2023. Chart shows a 6-month annualized month-over-month average of the core Personal Consumption Expenditures (PCE) index (excluding energy and food) and various sub-components of that index. Source: Bureau of Economic Analysis

The greatest risk to a positive outlook for 2024 is a re-acceleration of inflation, leading the Fed to pivot back to a hawkish stance. But when our analysts study the components of the consumer price index (CPI) and personal consumption expenditures (PCE) price index, they feel confident the downward inflation trend should continue for at least 6 – 12 months. Many of the largest components of the indices (such as rents) are falling, and these declines should feed into the indices over an extended period. More real-time inflation trends (such as 3-month and 6-month annualised inflation) are already showing inflation at or near the Fed’s 2% target.

Against this backdrop, portfolio manager Pramod Atluri has a positive outlook for fixed income returns in the coming year. This paper explores five bond themes he expects to see in 2024.

Pramod Atluri is a fixed income portfolio manager with 25 years of industry experience (as of 12/31/2023). He holds an MBA from Harvard and a bachelor’s degree from the University of Chicago. He is a CFA charterholder.

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