campervans @campervans: "𝙋𝙖𝙪𝙨𝙚 𝙖𝙣𝙙 𝙋𝙞𝙫𝙤𝙩? Going into 2024,..."

United Arab Emirates

𝙋𝙖𝙪𝙨𝙚 𝙖𝙣𝙙 𝙋𝙞𝙫𝙤𝙩? Going into 2024, equity markets are pricing a perfect landing, making bonds look more and more attractive in what is an imperfect World. High Grade fixed income, seems a well priced area to look at with a valuation cushion still in place. US yields are at post ‘08 highs, while equity risk premiums are low - particularly so, given the macro environment. Currently consensus is a rate cut between March and June next year. With roughly a 100bps fall in 2024. 👍 Bonds pose a good option for 2 reasons: 1. Cuts could be because of a sharp decline in growth or recession - capital tends to run for safety (bonds) during these times. 2. Bonds are priced on their yield-to-maturity - i.e. the amount of interest they’ll pay, until they mature (the date the loan is paid back). If yields drop 1% on a 10yr bond, the price increases by 10%. The challenges for equities in a rate falling environment are: 1. If growth slows, earnings do too 2. If rates are cut, because inflation is coming down, it really means companies are less able to drive growth through price increases. 3. Rate cuts aren’t stimulus (as they have previously been). The FED targets real rates, which if growth slows, real rate can remain the same as absolute rates are cut. The FED’s goal is to simply normalise real rates, not pump growth. Or simply put, they are adjusting the interest rates to align with underlying economic conditions - not to pump the markets. This is an important distinction often overlooked. ⚠️ The key risks to being heavy on bonds are: 1. A re-acceleration of inflation (a risk the market grossly underestimates at the moment), a risk I believe is real based on current information, but not likely to appear until June onwards. 2. Higher risk premium - i.e. a greater worry that governments or companies won’t be able to pay the principle of their loan back. As Federal Reserve Chairman Jerome Powell has stated “I’m not calling into question the progress, we just need to see more” ⭐ To summarise, rates cuts come with decelerating growth, this is a win win for Bonds. It's also a positive carry trade - meaning you get paid for holding bonds. 🔎 ETF’s to look at are: $IEF $ISTB $IGIB Or an investment grade European bond ETF (are there any on eToro?), would play both the rate cut and dollar weakness. ----- Image source: ChatGPT

3 Mentioned

IEF

iShares 7-10 Year Treasury Bond ETF

ISTB

iShares Core 1-5 Year USD Bond ETF

IGIB

iShares 5-10 Year Investment Grade Corporate Bond ETF