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Supercharged returns and the promise of AI have drawn investors<\/a>\u2014and meme-stock speculators<\/a>\u2014to equity markets in recent years. But it\u2019s been a very different story for the bond market.<\/p>\n After keeping interest rates near zero for almost a decade after the Great Financial Crisis and again during the COVID era, the Federal Reserve began aggressive rate hikes to fight inflation in March 2022. That led to a painful fixed-income bear market<\/a> due to the inverse relationship between bond prices and yields (which move with the Fed funds rate).\u00a0<\/p>\n It\u2019s now been 46 months since the bond market last reached a record high, and the Bloomberg Aggregate Bond Index is down roughly 50% from that July 2020 peak. But with bonds finally offering solid yields, some of the world\u2019s top fixed-income investors believe this is the best time in a generation to get into bonds.<\/p>\n \u201cThe entry point is just very, very attractive,\u201d Anders Persson, CIO of fixed income at the global asset manager Nuveen, told Fortune<\/em> in a recent interview. \u201cI mean, basically, yields, as you know well, are the most attractive that we\u2019ve seen in 15 plus years.\u201d<\/p>\n As Rick Rieder, global CIO of fixed income and head of the asset allocation team at BlackRock<\/a>, noted, the Fed\u2019s rate hikes have essentially \u201cput the fixed back into fixed income.\u201d<\/p>\n \u201cYou can create a portfolio with a close to 7% yield with volatility that\u2019s pretty moderate. It\u2019s been decades since you\u2019ve been able to do that,\u201d he told Fortune<\/em> last month.<\/p>\n After investors lock in those yields, bond prices could also rally when the Fed starts cutting rates later this year or next. It\u2019s a golden opportunity for a mix of steady income and price appreciation, according to these bond market gurus.<\/p>\n Persson and Rieder\u2014who are collectively responsible for roughly $2.8 trillion in assets, or about 23 times more than the value of every NBA team put together\u2014are bullish on bonds even as PIMCO co-founder and \u201cbond king\u201d Bill Gross has cautioned that without rate cuts to boost prices, bond market investors will merely be \u201cclipping coupons<\/a>,\u201d or collecting interest income from yields. <\/p>\n Those coupons are quite juicy in many sub sectors.\u00a0<\/p>\n \u201cWhen you\u2019re looking at 6% or so for broader fixed income, 7% for preferred, 8% for high yield, and almost 10% for senior loans, those entry levels are really, really attractive from a historic basis,\u201d Nuveen\u2019s Persson emphasized.<\/p>\n He added that, historically, there\u2019s a high correlation between future total returns for fixed-income investors and how high yields were when they began investing. To that point, NYU Stern\u2019s annual return chart<\/a> shows that bonds tend to outperform after peaks in the Fed\u2019s hiking cycles (i.e. when yields are high).\u00a0<\/p>\n Corporate bonds, for example, offered 15%-plus returns to investors for five straight years after then-Fed Chair Paul Volcker famously raised interest rates to a peak of 19% in 1981 to fight runaway inflation. And they outperformed stocks three out of five of those years as well.<\/p>\n Rieder also said there\u2019s serious price appreciation potential in bonds because rate cuts are likely on the way once data eventually confirms the Fed has defeated inflation.<\/p>\n Persson, who is forecasting one or two rate cuts this year, said that if the economy starts to crack, the Fed will have to cut aggressively. \u201cAnd then you get the total return aspect, or the capital appreciation side, of that investment,\u201d he told Fortune<\/em>, adding that \u201cin most scenarios, you\u2019re seeing a pretty healthy return potential here over the next 12 months.\u201d<\/p>\n There is also evidence that bonds could still outperform even if interest rates stay where they are, with the Fed maintaining its current wait-and-see mode for longer than expected. In a note to clients<\/a> last summer, LPL Financial\u2019s chief fixed income strategist, Lawrence Gillum, noted that the Bloomberg Aggregate Bond Index has performed well during periods when the Fed has paused its rate hikes historically.<\/p>\n \u201cSince 1984, core bonds were able to generate average 6-month and 1-year returns of 8% and 13%, respectively, after the Fed stopped raising rates. Moreover, all periods generated positive returns over the 6-month, 1-year, and 3-year horizons,\u201d he wrote.<\/p>\n For Rieder, that\u2019s one reason why the current environment, where the Fed is stuck in a holding pattern, is a Goldilocks zone for fixed income investors. \u201cYou have this incredible gift, because inflation is staying where it is, we\u2019re getting to buy credit assets cheaper than we should be,\u201d he explained.\u00a0<\/p>\n<\/div>\n\nWhy the bond investors are bullish<\/h2>\n
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