/Investors rush to snap up bonds before the Fed starts cutting rates

Investors rush to snap up bonds before the Fed starts cutting rates

More investors have been flocking to bonds in 2024 to capture today’s higher bond yields before the Federal Reserve starts cutting interest rates.

When rate cuts come, earning 5% by sitting in cash and cash-like investments can quickly evaporate, especially if the Fed ends up responding to a crisis by deeply cutting its short-term policy rate.

“There is a lot of money out there looking for income over the longer term,” said Robert Tipp, chief investment strategist at PGIM Fixed Income, in a phone interview Tuesday.

“The flows have turned positive, and strongly so.”

Investors poured an estimated $113 billion into bonds globally this year through Feb. 28, roughly half the $234 billion that flowed into money-market accounts, but well above the $84 billion that went into equities, according to BofA Global and EPFR data.

“With central banks being at their peaks for this cycle, the big-picture idea that investors have is that we should be in bonds right now,” Tipp said.

When looking regionally, U.S. bond funds have seen significant inflows in 2024, outpacing last year’s volumes for the same stretch.

U.S. bond funds are attracting significant inflows in 2024, outpacing last year’s volumes.

EPFR, Barclays Research

Last week saw notable outflows from short-term government funds and short-term corporate funds, but continued strong inflows into long-term bond funds, according to Barclays Research.

The moves into long-term bonds signal investors may be heeding the advice of notable bond investors to add duration before the Fed pivots to rate cuts.

Atlanta Fed President Raphael Bostic said Monday that the central bank has the “luxury of making policy” without the urgency of a weak labor market or economy.

U.S. stocks were pulling back sharply Tuesday, after hitting a series of record highs, lifted by enthusiasm for the future of artificial intelligence, resilient corporate earnings and an economy that has long avoided a recession, even with the Fed keeping its policy rate at a 22-year high, in a range of 5.25% to 5.5%, since July.

The Dow Jones Industrial Average
was down about 450 points, or 1.2%, at last check, while the S&P 500
was 1.3% lower and the Nasdaq Composite Index
was down 2%, according to FactSet.

Benchmark 10-year Treasury yields
were down 8 basis points to 4.14%.

“Typically, the end of a Fed hiking cycle is an ideal long-term buying opportunity for fixed income,” said Brian Quigley, head of MBS, agencies, and volatility at Vanguard, in a Monday client note.

“In the past four hiking cycles, returns for U.S. bonds exceeded that of cash over the one- and three-year periods following the Fed’s final rate hike.”

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