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Macroeconomic climates showing a bullish level of growth and consumer confidence, combined with low enough inflation and low enough interest rates to facilitate widespread growth, are synonymous with equities, usually.

So, next year should really be the time of stocks and we should be asking how the stock market will do in 2024, right?

Well, not so fast. It’s true that investors everywhere are gear up for a bull run and the stock prices to match in 2024. But what if that’s not what happens?

Actually, there are a couple of signs showing that 2024 might be a year of stronger performances by bonds – one of the worst-performing asset classes in recent years – instead.

How will bonds perform in 2024?

As HSBC Management said in their 2024 investment outlook: ‘bonds are back’. According to them:

Market expectations are for a soft landing. But as the cycle slows and inflation falls, bonds are back… The broad trend is for inflation to fall back towards central bank inflation targets over 2024. 

Looking further ahead, we think there are a number of forces that will keep inflation somewhat higher than we were used to in the 2010s… In our view, the new paradigm is likely to be one of interest rates around three percent and bond yields around four percent.”

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Meanwhile, asset manager Abrdn’s global head of fixed income Craig MacDonald said in his latest investment insights that:

Inflation is finally coming down, which means interest rates in large economies such as the US, Europe, and UK have likely peaked. However, to turbocharge bond returns, central banks will need to start cutting interest rates by the second half of next year. 

If we look at the historical relationship between interest rate cutting cycles by the US Federal Reserve (Fed) and bond performance, the periods following peak interest rates have led to strong returns in many parts of fixed income [including bonds]”

Two reasons bonds may perform well in 2024 

There are a couple of elements to unpack here. Read on to discover two things to consider that may change your perspective on the bond market in 2024:

1. While the Fed has made all the right noises, inflation is still lurking 

When the FOMC made a surprise hint at several possible rate cuts in 2024 during its December interest rate decision, it looked like a very definitive announcement for 2024 being ‘the year of the dove’ with mass rate cuts to take place.

But the truth is that, if the FOMC lowers rates early next year and inflation doesn’t rise up to meet them, it would be akin to a magic trick. That’s why central banks always use rate hikes when inflation is getting high – because it works, for the most part. But inflation is notoriously hard to tame, and interest rate cuts are therefore notoriously hard to bank on (pun intended).

But what does this mean for bonds? In the words of JPMorgan Chase, in their outlook on the 15^th of December:

With the Fed (and other central banks) now on the verge of cutting (and potentially sooner rather than later), once-juicy yields on cash stand to fall – and fast. This also means that now looks like the time to consider locking in still-elevated bond yields. The opportunity cost against cash looks even greater after this week’s central bank meetings, especially if we end up seeing more cuts than we expect.”

2. It’s not just about America 

The United Kingdom, Europe, and many more places are also seeing an increase in interest surrounding bonds (pun intended). As the Financial Times reported earlier this month:

Interactive Investor, the UK’s second-largest investment platform, saw a 607 percent rise in GILT purchases in 2023 year-on-year… Gilt buying also accelerated throughout the year, with purchases in the third quarter increasing by 81 percent compared with the second quarter and by 340 percent against the first quarter… 

The surge in demand for gilts came as interest rates rose far above the relatively low levels seen since the financial crisis. Rising interest rates cause bond prices to fall and yields to rise.”

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