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From the start of 2022 through the end of last year, the Federal Reserve raised interest rates a whopping 11 times, marking one of the central bank’s most scorched earth campaigns of rate tightening in recent memory.
As a result and not surprisingly, bonds endured significant punishment. Even with the benefit of a modest 2023 rebound, the widely followed Bloomberg US Aggregate Bond Index is down 8.2% over the past two years. In theory, the resulting high Treasury yields are problematic for advisors and clients alike. After all, rising yields mean declining prices.
Compounding the woes of the fixed income market is the point that in 2023, the yield curve spent significant time being inverted, meaning two-year Treasurys sported higher yields than 10-year counterparts. Fortunately, a majority of advisors believe that inversion will come to an end in 2024.
“According to the latest InspereX Pulse Survey of 384 financial advisors, the majority (62%) believe rates on the 2-year U.S. Treasury are at peak now, while 26% believe rates will hit 6%, and 12% say between 7-9% over the next 18 months,” notes the research firm.
How High Bond Yields Can Help Advisors
The InspereX survey indicates that there are tangible benefits for advisors attributable to higher bond yields, including the point that some clients want to trim equity allocations to increase exposure to fixed income to take advantage of those elevated yields.
“More than two thirds (68%) said their clients are moving some of their equity allocation into fixed income,” according to the study. “65% said higher rates have made their conversations with clients more positive in tone.”
Add to that, 61% of advisors said clients are eager to tap into higher rates now to capitalize on those elevated yields for as long as possible and more than half said higher interest rates have been impactful in terms of converting prospects to full-fledged clients.
There are other avenues through which higher bond yields can help advisors. Those include presenting pensive clients with an illustrative plan regarding how to effectively navigate the “higher for longer” regime.
“That said, advisors offered a word of caution about higher rates: 59% said investors are only looking at rates and don’t understand you can lose money in fixed income. More than half (55%) did not believe that the 60/40 portfolio was back,” noted InspereX.
How Advisors Intend to Generate Income for Clients in 2024
Perhaps surprisingly, 35% of advisors polled by InspereX said they plan to use individual bonds as income-generating tools for clients in 2024. That compares with 30% that are eyeing allocations to fixed income funds.
Thirty-four percent said they’ll be relying on dividend-paying stocks and 53% said they’ll use CDs or other high-yield cash instruments.
“Advisors are once again embracing the benefits of individual bonds to help achieve their clients’ needs and goals, address personal preferences and elevate the perceived value of their service,” said John Tolar, InspereX Head of Fixed Income Sales & Trading. “As yield has returned to the market, advisors have acted on the opportunities to secure income for their clients and insulate portfolios from potential broad market drawdowns and the near certainty of heightened market volatility in the coming year. The growing likelihood of the higher-for-longer environment has also been especially beneficial for their bottom lines.”