After seeing the Bloomberg US Aggregate Index fall by 13% in 2022 – its worst year on record – it is understandable that some investors may feel queasy at the prospect of jumping back into fixed-income markets. However, it is important to remember that the yield of a bond benchmark provides a reasonable estimate of its forward return. As such, with the current yield offered by the bond markets potentially the high-water mark for this rate hiking cycle, investors could be well-served by taking advantage of this opportunity before the window begins to close.
Despite the prospect of a looming credit crunch, the Federal Reserve has indicated that it does not plan to lower interest rates. However, market pricing indicates that investors anticipate a Fed pause and that rates may be cut as early as September 2023. As growth slows and inflation continues to moderate, the yield of the Bloomberg US Aggregate Index is closely tied to the Fed Funds rate, and bond yields may follow suit if the Fed lowers rates.
Therefore, investors may have a window of opportunity to invest in fixed income before this potential rate cut occurs. The yield on the Bloomberg US Aggregate Index is currently at its highest level in nearly 15 years, and with the current yield possibly marking the high-water mark for this rate hiking cycle, investors may benefit from taking advantage of this opportunity while it lasts. However, it is crucial to carefully assess risks and ensure that any fixed-income investments align with their investment objectives and risk tolerance.
