The Bond Market and Fed Outlook

This is Brad Barrie, Chief Investment Office and Portfolio Manager with Dynamic Wealth Group.  Welcome to this market and economic update. In this video, we’ll provide insights on the bond market as the Fed potentially prepares for its first rate cut by the end of the year.

It’s no secret that bonds have struggled in recent years due to inflation and high interest rates. Bonds are particularly sensitive to interest rates.  When rates rise, the price of existing bonds fall.

So, when rates jumped in 2022 due to inflation and rapid Fed rate hikes, bonds fell into a bear market. However, they then stabilized and rebounded somewhat in 2023.

Today, many of the factors that have driven bond returns are improving. Over the next few minutes, we’ll cover some insights into the bond market and why it’s important to maintain portfolio diversification in the months and years to come.

First, this chart shows the performance of different bond market sectors each year. Each column is a different year with bond market sectors ordered from best performing at the top, to worst performing at the bottom.

On the right, you can see that the Bloomberg U.S. Aggregate Bond Index is now flat on the year after struggling through April. This was because inflation was worse-than-expected the first few months of the year which pushed bond prices lower.

However, there are now signs that inflation is improving. The latest Consumer Price Index report, for instance, showed that headline CPI was unchanged in May for the first time since July 2022. Certain areas such as housing prices remain stubborn. But removing housing prices from core CPI results in a year-over-year inflation rate of only 1.9%.

Of course, improving inflation does not mean that prices will actually fall for most goods and services we buy. But this is still positive for markets because it means we are slowly returning to a more “normal” environment, especially once the Fed begins cutting rates.

For this reason, other parts of the fixed income market have also improved, including investment grade and high yield bonds.

Next, this chart shows the federal funds rate and the Fed’s rate cut projections. Their latest meeting resulted in no change to policy rates, but the committee did revise their forecasts from 3 cuts this year to only 1. The remaining two cuts were simply pushed back into 2025.

These projections are very much the result of worse-than-expected inflation earlier this year. The market still seems to believe that two rate cuts could be possible, with the first one beginning in September or November.

Regardless of whether it’s one cut or two, the point is that we are on track for the Fed to begin reversing its policy moves of the past two years.

If this happens, it could help to support bond prices which benefit when rates are stable and falling. Of course, the Fed’s projections are subject to change, and a lot could happen between now and year end. Still, this is positive for long-term investors since it means that portfolio diversification is more important than before.

Historically, bonds have helped to balance portfolios since they have the ability to move in the direction opposite to stocks. When the economy and stock market stumble, for instance, interest rates tend to fall which helps to boost bond prices.

This pattern has not played out as much the past few years since recent volatility has been the result of inflation which hurts bond prices. This is why 2022 experienced such a dramatic bear market for bonds.

We believe it is crucial to follow a Multi-Dimensional Asset Allocation approach.  You see when you rely on only one main risk reducing ingredient to stocks, such as bonds, you can think of it as essentially riding on a two spoke bicycle wheel.  If one spoke breaks, you’ll have a very bumpy ride, if both spokes break, you’ll most definitely crash.  That is why our Multi-Dimensional approach incorporates numerous risk reduction ingredients.  So, in years like 2022 when both stocks & bonds fell, having tactical bond strategies, or arbitrage strategies, or global macro long short strategies, just to name a few examples, could have helped to provide a smoother return experience.

Now, if inflation truly is improving, at least at the macro level, and the Fed does cut rates, then there could be a tailwind for bonds. In addition, yields are far more attractive than they have been at any other time since the 2008 global financial crisis.

So, for both long-term investors and those who need portfolio income, including retirees, it’s more important than ever to get diversified with not just stocks and bonds, but also adding in other non-correlated ingredients.  Remember, we believe investors should focus on Preparing for the Future, and not attempting to Predict the Future.

We’ve only scratched the surface on this important topic, but I hope you found these insights valuable.   If you are a financial advisor and would like more information on our Multi-Dimensional Approach towards asset management, please visit our website, or reach out directly by emailing us at:  If you are an individual investor, we are happy to address any questions you may have and put you in touch with a qualified advisor if so desired.   Until next time, take care everyone, and make smart, logical & fact-based financial decisions.

Clearnomics and Dynamic Wealth Group, LLC are not affiliated entities. No part of this should be taken as investment advice. Consult your financial advisor for specific investment recommendations tailored to your specific situation.
Dynamic Wealth Group (“Dynamic”) is an SEC registered investment adviser. SEC registration does not constitute an endorsement of Dynamic by the SEC, nor does it indicate that Dynamic has attained a particular level of skill or ability. This material prepared by Dynamic is for informational purposes only. It is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy, or investment product. Opinions expressed by Dynamic are based on economic or market conditions at the time this material was written. Economies and markets fluctuate. Actual economic or market events may turn out differently than anticipated. Facts presented have been obtained from sources believed to be reliable. Dynamic, however, cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source.
Dynamic does not provide tax or legal advice, and nothing contained in these materials should be taken as tax or legal advice.
Any reference to an index is included for illustrative purposes only, as an index is not a security in which an investment can be made. Indices are unmanaged vehicles that serve as market indicators and do not account for the deduction of management fees and/or transaction costs generally associated with investable products. Past performance is no guarantee of future results. Actual returns may be lower.

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