By Joy Wiltermuth
'There is no alternative' to stocks - or 'TINA' - is no longer the only force in markets
Goodbye, TINA.
As it turns out, there now is an alternative to stocks. The bond market has gotten exciting again for investors, after roughly a decade in which the "income" part of fixed-income largely was missing.
Higher yields since 2022 have been helping bond portfolios get their mojo back. The Federal Reserve's expected moves to cut interest rates from roughly a two-decade high have investors scouring for ways to keep meatier bond returns coming in the months, and years, to come.
"We think the curve is going to steepen here as the Fed cuts rates this year, and continues cutting gradually throughout next year," said Tony Rodriguez, head of fixed-income strategy for Nuveen's global fixed-income team, in an interview with MarketWatch.
Specifically, Rodriguez expects 5% short-term rates to normalize around the 3% range over time. But he also isn't afraid of adding duration, with yields on longer 10-year Treasury notes BX:TMUBMUSD10Y already in the ballpark of his projected 3.5% to 4.5% longer-term range. The benchmark borrowing rate was near 4.17% on Thursday.
"From there, you have all kinds of reasons why it can trade higher or lower," Rodriguez said, speaking to potential volatility in economic data, still-elevated borrowing costs and jitters around the U.S. election this fall.
But ultimately, Nuveen sees a roughly 4% yield on the 10-year Treasury as a reasonable longer-term range, given the team's expectation that the Fed eventually returns inflation back to its 2% target.
An economic soft landing, or even a relatively mild U.S. recession, also should allow the Fed to normalize interest rates, but not cut them back to nearly zero, as they were in 2020.
Daniel Siluk, a portfolio manager at Janus Henderson, thinks easing inflation and interest rates bolsters the case for why investors with some $6.4 trillion parked in money-market funds should start reallocating to short-term bonds, particularly Treasury and corporate bonds trading at a discount.
See: Why 70% of U.S. corporate bonds still trade at a discount
"Fixed-income can really fill the needs that people expect it to fill in an investment strategy," Rodriguez said, referring to the generation of income and the balancing out of potential downside risks in an equity portfolio.
Relatively high-quality bond strategies look ripe to generate 5.5% to 6.5% returns, he said, while aggressive approaches could see 8% and higher returns.
"That, to us, is a pretty attractive level of income relative to historical equity-market returns."
Watch: Bonds are becoming popular for new investors. Here's what to know.
When the 10-year Treasury yield hit a peak of 5% in October, stocks tumbled into correction territory. The Dow Jones Industrial Average DJIA on Thursday was easing back from a fresh record high, while the S&P 500 SPX and the Nasdaq Composite COMP were both lower a day after the Nasdaq booked its worst daily performance since December 2022, according to Dow Jones Market Data.
The S&P 500's retreat comes after it booked a nearly 15% gain in the year's first half, blowing the 4.72% historical average for the first six months of the year "out of the water," as MarketWatch's Christine Idzelis reported in June.
Higher bond yields, but also jitters about the stock market's narrow advance this year, have kept many investors parked in cash and cash-like investments.
See: T-bill and chill: Americans are holding a record $2.4 trillion in Treasurys
Goldman Sachs tactical strategist Scott Rubner said this week that he would't recommend "buying the dip" in stocks, given that returns after July 17 typically get tougher to come by.
The Fed is looking to tee up its first rate cut of this cycle, potentially in September. Its policy rate has been kept steady in the 5.25% to 5.5% range since last July.
But with credit spreads tight and the full impact of higher rates still uncertain, Nuveen remains cautious about bonds in some of the lowest credit-quality buckets, which also tend to be more prone to defaults.
"There are environments when you want to push as hard as you can," Rodriguez noted. "We're saying: Okay, you probably don't want to completely give up liquidity because valuations are a bit on the tight end."
Investors will also want wiggle room to take advantage of dislocations that might take place, he added.
-Joy Wiltermuth
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07-18-24 1316ET
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