As global bond markets rebound, experts highlight US Treasuries' value amid economic uncertainty
In an article by Wealth Professional, produced in partnership with Franklin Templeton, the global bond market has returned to a more traditional environment in the second half of 2024, with income once again driving performance in fixed income.
Jack McIntyre, portfolio manager at Brandywine Global, emphasized, “Income in fixed income is back to being a driver of performance,” pointing to the growing value of developed market bonds, particularly US Treasuries.
Financial advisors are seeing improved prospects as market dynamics shift. The US Federal Reserve is expected to begin its interest rate cutting cycle in September, following persistent inflation in the US.
Yields on 10-year US Treasuries rose from 3.8 percent in December to approximately 4.7 percent in April before returning to around 3.8 percent in August.
Meanwhile, the Bank of Canada has already implemented its first round of rate cuts, causing a reduction of around 85 basis points in yields on 10-year Canadian government bonds from their peak earlier in 2024.
McIntyre believes now is the time to move out of cash and shift further along the Treasury curve. “We believe the time will be right to move out of cash and to position farther out on the Treasury curve,”
McIntyre stated, with expectations that the Fed’s upcoming rate cut will redirect some of the over $6tn in money market funds toward US Treasuries.
McIntyre highlights the attractiveness of longer-dated US Treasuries due to their steady income potential and price appreciation in a rate-cut environment.
He explained, “We like the return potential of longer-dated US Treasuries,” supported by the current US labour market data.
McIntyre also emphasized the importance of monitoring jobless claims, stating, “If it comes down to only one economic data point, initial/continuing jobless claims in the US would be the series that warrants watching,” reflecting the labour market's role in the Federal Reserve’s decision-making.
McIntyre likened longer maturity bonds to “a low-cost insurance policy” against economic downturns, expecting positive returns in most scenarios unless there is a significant economic rebound with inflation, which could lead the Fed to raise rates, negatively affecting bonds.
Additionally, McIntyre warned of potential market volatility stemming from the upcoming US election.
He predicted that “election-related market volatility” could begin earlier than usual in 2024, and suggested that a divided government, regardless of who wins, would be the most favourable outcome for markets. This would likely prevent major new spending programs or tax cuts.
Globally, McIntyre pointed to developments in bond markets, with Japanese bonds facing uncertainty, US Treasuries poised to outperform European bonds if the US economy slows, and UK gilts showing potential to outperform core eurozone bonds in the second half of 2024.
