Kathy Jones writes:

It has been a long time coming, but 2023 looks to be the year that bonds will be back in fashion with investors. After years of low yields followed by a brutal drop in prices during 2022, returns in the fixed income markets appear poised to rebound. It’s likely to be a bumpy ride due to the cross currents created by global central banks’ tightening policies, a volatile global economy, and ongoing political uncertainty here and abroad. Despite these challenges, we see opportunities in 2023 for the bond market to provide investors with attractive yields at lower risk than we’ve seen for several years.

We look for the Federal Reserve to end its rate hikes in early-to-mid 2023 amid a soft, perhaps recessionary, economy that brings inflation lower. The yield curve is likely to remain deeply inverted as monetary policy remains tight. Assuming the Fed sticks to its tight policy stance at the expense of economic growth, ten-year yields could fall as low as 3%. With that backdrop, we favor adding duration to bond portfolios during periods of rising rates, while staying up in credit quality.

2022: The great reset

In 2022 the bond market went through a huge resetting of interest rates. Coming into the year, short-term interest rates were still near the pandemic-era low of close to zero. The Federal Reserve began a gradual shift to tighter monetary policy with a 25-basis-point rate hike in March 2022 as economic growth recovered. Gradualism soon gave way to rapid tightening by summer as inflation surged on the back of supply/demand imbalances, a resilient economy, and the spike in oil prices due to the war in Ukraine.

In all, the pace of rate hikes has been the most rapid in modern times…

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