May 28, 2024

Seek ‘high-quality’ investments, strategist says

It was a wild 2023 for the US Treasury market. But what could be in store for 2024? Schwab Fixed Income Strategist Collin Martin joined Yahoo Finance to discuss opportunities in bonds after last year’s turmoil.

Martin believes “the peak in yields is behind us,” creating openings across fixed income. While staying selective, he expects “positive total returns seem likely” in 2024 given high, but moderating yield levels.

His advice is to use bonds to add “balance” to a portfolio through “high-quality” investments offering yields that are off extreme their peaks, but that still provide substantial income. Martin notes bonds’ uniqueness in driving portfolio stability, saying negative returns are “relatively rare.”

Though “a tough proposition to consider,” he suggests taking advantage of higher yields on longer-term maturities.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor’s note: This article was written by Angel Smith

Video Transcript

RACHELLE AKUFFO: So, Collin, for people who are trying to figure out how to play the fixed income market, if they’re looking at corporate bonds versus government bonds, what is your breakdown of the expectations? Where do you see the opportunities?

COLLIN MARTIN: Well, we see opportunities in a number of different types of bonds out there. If we look at the big picture outlook for most fixed income investments that a lot of individual investors are considering, we think positive total returns seem likely this year, because we do think the peak in yields is behind us. So we don’t expect a sharp increase in yields, which will pull prices lower.

But there are a lot of different types of bonds out there, and our main focus for investors, especially our Schwab clients, are to focus on higher quality investments. Because if you look at high-quality investments, those with high ratings, specifically investment-grade credit ratings, we’re still at yields that are near their highs of the past 14 or 15 years. Yes, they’re off their peak, but they’re still relatively high compared to where we were for most of the years following the financial crisis.

And if you look at the extra yield that riskier bond investments offer, like high-yield bonds or preferred securities, that spread is relatively low. And we think it makes sense to take additional risk with riskier investments if you’re being compensated for it. And that’s really not the case this year.

So if you look at those riskier types of bond investments, we also think positive total returns are possible and likely this year. But we think excess returns or outperformance relative to treasuries will be really difficult to achieve, mainly because of those rich valuations.

RACHELLE AKUFFO: And as we were just talking about with Jared, a lot of defensive stance is being taken to kick off the year. How do you balance sort of fixed income with the rest of a portfolio right now?

COLLIN MARTIN: Well, we think fixed income, specifically high quality investments that we just discussed, those are really meant to provide ballast to your portfolio. Not that we can ignore what’s happened over the past few years, but 2022 really was an anomaly. And if you go back over the past 30 or 40 years and what high-quality fixed income investments provide, specifically those investments that make up the US aggregate index, negative total returns are relatively rare and they tend to provide stability.

So I think if you’re an investor right now, figuring out how to balance your portfolio and specifically where to go in the bond markets, take advantage of those high yields that are available right now. And don’t be afraid about going out a little bit further in maturities. We know it’s a tough proposition to consider with short-term rates higher than long-term rates.

If you look at short-term CDs or treasury bills or money market funds, those yields are admittedly very attractive, especially when you have a 10-year treasury yield at 4%. But those short-term yields aren’t likely to be that high forever. So we suggest investors move a little bit further out and lock in that 4%, 4.25% for a number of years rather than having to worry about what the Fed may or may not do between now and then, and just accept that 4% annually for a number of years and you can kind of sleep well at night.

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