DoubleLine Capital: Finding a Bottom in Bonds
Bond yields have been driving the stock market in recent weeks. Since June, bond yields have risen by 100 basis points on average. That’s Wall Street speak for a 1 percent move. That kind of move in yields is massive.
And as yields rise, prices fall. The bond market is on track to see its third down year in a row, following big losses in 2022 and small losses in 2021. This will be the first time in history for a three-year decline.
10-year U.S. bond yields just rose over 4.9 percent, the highest level in over 15 years. Part of the move may come from the fact that markets are saturated with U.S. Treasuries.
The U.S. doesn’t just have over $33 trillion in debt. The country is also running a $2 trillion deficit this year. That’s the largest peacetime gap in real terms and as a percentage of GDP. Higher yields entice borrowers to buy Treasuries. But it does mean pain for existing bondholders.
Those who hold bonds to maturity won’t lose money. But bond prices have to drop to reflect higher yields, which will show up on brokerage statements.
However, with inflation declining and the economy slowing, it’s likely that bonds may be near a short-term price low. And the potential for rate cuts in 2024 could lead to a strong reversal year for bonds.
Long-term investors may want to start buying now, and traders should look to profit from rising bond prices next year.