The main factors influencing a bond’s duration are time to maturity and its coupon rate. In general, the longer the time to maturity, the higher the duration. The higher the bond’s coupon rate, the lower the duration, all else being equal. For example:
| ETF | Ticker | Effective Duration | Effective Maturity |
| Vanguard Short-Term Bond ETF | BSV | 2.64 years | 2.80 years |
| Vanguard Long-Term Bond ETF | BLV | 14.13 years | 22.60 years |
An investor in BSV can expect a 2.64% increase in the value of the fund due to a 1% decline in interest rates. Likewise, an investor in BLV could expect a 14.13% increase in the fund as a result of a 1% decline in interest rates. These of are approximations, of course, and don’t include any market or other factors that could influence the price of an ETF over time. Also, duration is an estimate, not a set number.
For clients invested in individual bonds or bond funds, should interest rates decline as many predict, aided by any Fed interest rate cuts, they could experience potentially significant increases in the value of their bonds or bond funds, especially if they are on the longer end of the duration spectrum.
Bond and CD ladders
With interest rates at high levels, this can be a good time to lock in these rates with individual bonds orcertificates where appropriate. Keil, the financial advisor, said that the bond market is telling us to lock in before the Fed starts cutting.
A strategy to consider is building a bond ladder or a CD ladder if that fits into a client’s overall financial planning and investment strategy. Using a ladder allows clients to lock in today’s relatively high rates without worrying about where rates go as long as they hold the bonds or CDs until maturity. While bonds seem to get more press, a recent article by Fidelity indicated that some CD rates are very favorable compared with some riskier bonds.
As each holding on the ladder matures, clients can decide how to reinvest the money. This could be at the longer end of the ladder or elsewhere. In the meantime, clients benefit from the interest earned during the holding period.
While the Fed has indicated that it will be cutting rates, there is no guarantee as to when these cuts will start and how extensive they will be. Experts’ opinions vary on this topic and also on inflation and the overall economy. Both areas can influence the direction of interest rates.
A risk, especially for clients using ETFs and mutual funds to invest in bonds, is to know when rate cuts have run their course. At that point, the risk, especially with longer duration holdings, is that rates could head back up. That could cause a decline in the value of these funds, potentially eroding some or all of the profits made from price increases fueled by declining interest rates.
Most clients likely have a target allocation for bonds and fixed income within their overall asset allocation. While it can make sense to direct some of this allocation to longer duration bonds or other areas that are expected to benefit from falling rates, it’s important to have a plan associated with any of these changes to realize gains and minimize risk. One option, if longer duration bond ETFs are being used, is to use stop orders to minimize the downside potential should rates head back up.
Longer duration ETFs, mutual funds or individual bonds could trigger capital gains when sold after a significant interest rate decline. Planning should take this into account. If there is latitude in a client’s accounts, some consideration should be given as to where to hold these assets in order to minimize the tax hit from these gains. This could also be a factor in portfolio rebalancing over the next couple of years.
The current environment looks very favorable for bonds. Your guidance can help clients benefit from the current situation while not straying from their long-term investment strategy.
FAQs
Credit spreads remain very tight, and the yield you can earn when adjusted for duration favors high-quality intermediate bonds. So, investors are not really being paid to take on credit or interest rate risk.” Others have said that 2024 might be the time to invest toward the longer end of the risk-return spectrum.
Are bonds good investments in 2024? ›
As inflation finally seems to be coming under control, and growth is slowing as the global economy feels the full impact of higher interest rates, 2024 could be a compelling year for bonds.
What is the best bond for 2024? ›
While it is constantly changing, here is a sampling of funds from Morningstar's list of the best bond funds in 2024:
- PGIM Short-Term Corporate Bond (PSTQX)
- Pimco Diversified Income (PDIIX)
- Schwab Short-Term U.S. Treasury ETF (SCHO)
- Vanguard Long-Term Corporate Bond Index/ETF (VBLLX) mutual fund (VCLT) ETF.
Municipal bond yields started 2024 at their highest level since 2011. In this environment, investors may enjoy attractive total returns from income alone, a dynamic absent for almost 10 years. Municipals do not need a meaningful rate rally or dramatic spread compression to offer outsized, equity-like returns.
What is the best bond ETF for 2024? ›
Best bond ETFs April 2024
- The best bond ETFs.
- Vanguard Total Bond Market ETF (BND)
- Vanguard Total International Bond ETF (BNDX)
- iShares Core U.S. Aggregate Bond ETF (AGG)
- iShares Core Total USD Bond Market ETF (IUSB)
- Schwab U.S. Aggregate Bond ETF (SCHZ)
- SPDR Portfolio Aggregate Bond ETF (SPAB)
Expecting another strong year in 2024
Following large front-loaded new issue supply, EM IG spreads are now at attractive levels versus U.S. credit, setting up EM debt for outperformance. Our 2024 macroeconomic base case features slowing inflation and growth cushioned by Fed rate cuts.
What will happen to bonds in 2024? ›
Key central bank rates and bond yields remain high globally and are likely to remain elevated well into 2024 before retreating. Further, the chance of higher policy rates from here is slim; the potential for rates to decline is much higher.
What stocks to invest in in 2024? ›
10 Best Growth Stocks to Buy for 2024
| Stock | Implied upside from April 25 close* |
|---|
| Tesla Inc. (TSLA) | 23.4% |
| Mastercard Inc. (MA) | 19% |
| Salesforce Inc. (CRM) | 20.8% |
| Advanced Micro Devices Inc. (AMD) | 30.1% |
6 more rows3 days ago
Treasuries are generally considered"risk-free" since the federal government guarantees them and has never (yet) defaulted. These government bonds are often best for investors seeking a safe haven for their money, particularly during volatile market periods. They offer high liquidity due to an active secondary market.
Which bond is the most profitable? ›
Top 8 Bonds to Invest In for the Long Term
| Name | Ticker | Yield |
|---|
| Vanguard Short-Term Corporate Bond Index Fund | (NASDAQ:VSCSX) | 5.6% |
| Guggenheim Total Return Bond Fund | (NASDAQ:GIBIX) | 5.5% |
| Vanguard Total International Bond Index Fund | (NASDAQ:BNDX) | 3.4% |
| Fidelity Short-Term Bond Fund | (NASDAQ:FSHBX) | 5.1% |
4 more rowsThe principal difference between municipal bonds and Treasury bonds, aside from the credit considerations, is that municipal bonds are tax-exempt, that is interest is exempt from federal income taxation.
Which municipal bond has the highest yield? ›
They are the SPDR Nuveen Bloomberg High Yield Municipal Bond ETF (ticker: HYMB), VanEck High Yield Muni (HYD), and First Trust Municipal High Income (FMHI). BofA calculates the tax-equivalent yields as 8.7%, 8.5%, and 6.3%, respectively.
Can municipal bonds lose value? ›
Municipal bonds, like all bonds, pose interest rate risk. The longer the term of the bond, the greater the risk. If interest rates rise during the term of your bond, you're losing out on a better rate. This will also cause the bond you are holding to decline in value.
What type of bonds should retirees own? ›
In order to get adequate diversification, it's a good idea to spread the bond portion of your portfolio among various Treasury bonds, high-grade corporate bonds and, if you're in a high tax bracket, municipal bonds (because interest on munis is tax-free).
Is it better to buy bonds or bond ETFs? ›
For many investors, investing in the right bond funds can be a better option than holding a portfolio of individual bonds. Bond ETFs can provide better diversification — often for a lower cost — can offer higher liquidity, and can be easier to implement.
Should retirees buy long-term bonds? ›
March 18, 2024, at 1:34 p.m. Bond funds are well-suited for retirement investors seeking capital preservation because they tend to be much less volatile than stocks. Bonds make up the foundation of most successful retirement portfolios.
What is the 10 year Treasury prediction for 2024? ›
We are revising up our end-2024 and end-2025 forecasts for the 10-year Treasury yield by 25bp, to 4%. This reflects recent changes to our projections for the federal funds rate.
What is the Morningstar prediction for 2024? ›
While Morningstar economists expect real GDP growth to slow in 2024, our longer-term outlook is optimistic. Our researchers predict the U.S. economy will feel the lagged effects of the Federal Reserve's interest rate hikes. Consumers also seem cautious as household excess savings deplete.
Is now a good time to invest in bond funds? ›
“Yields are still attractive.” What's key for investors to remember is that “lower” is all relative. Bond market strategists and fund managers generally agree that yields are still attractive, especially relative to inflation, and will likely stay higher than before the pandemic.
Is it time to invest in bonds? ›
What to consider now. We suggest investors consider high-quality, intermediate- or long-term bond investments rather than sitting in cash or other short-term bond investments. With the Fed likely to cut rates soon, we don't want investors caught off guard when the yields on short-term investments likely decline as well ...
