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Since bond yields have been very low for many years, dividend stocks did not have much competition for the attention of income investors. But now, as the Federal Reserve continues to raise interest rates and tighten monetary policy to combat runaway inflation, the competitive landscape has changed dramatically and rapidly.
However, investors need to be careful before they start chasing rapidly rising bond yields. The yield on the 10-year US Treasury note was slightly below 3% this week, down from 1.5% at the end of 2021. Bond yields and prices are moving in opposite directions, in this case, pressuring prices in several classes of fixed income, such as high-yield and investment-grade corporate and municipal bonds ahead of what is expected to be more rate hikes and tightening by the Federal Reserve.
Still, “for the first time in over a year, we’re starting to see interest from our client base allocating to fixed income,” says Robert Michele, chief investment officer at JP Morgan Global Fixed Income, taking a more optimistic view on the bonds. -Investment prospects at current levels.
Institutional investors such as pension funds and insurers, he says, have shown interest in investment-grade companies that return around 4.5% and even around 5% with longer maturities, among other assets.
Some individual investors, Michele adds, have been pouring money into municipal bonds, whose yields have also risen nicely this year, as well as some taxable bonds.
Michele says market expectations for the fed funds rate, the central bank’s short-term benchmark interest rate, are about 3.25% a year from now, compared to the current target of 0. .25% to 0.5%. (The Fed is expected to raise that Wednesday by half a percentage point.)
Michele believes that short-term rates of 3.25% a year from now, or in that vicinity, make sense and is something bond investors can live with. “It looks like we’ve bottomed out in terms of bond prices for the next six to nine months,” she says.
Still, the bond market is riddled with cross currents.
Tom Tzitzouris, director of fixed income research at Strategas, says that while sophisticated investors can trade in and out of Treasuries as yield prices rebound, “for the long-term investor, I don’t think you’ll see this as an entry point. ”
He wants to see the yield on the 10-year Treasury note rise to around 3.25%, or even a bit higher. “I think all 10 can get there,” says Tzitzouris. “I don’t know if we’re going to get there next week, next month or next year. [But] that would be a good point for a buy-and-hold investor” to jump into bonds.
Tzitzouris adds that he doesn’t see much value in the 10-year bond in his recent yield range because it is “below even the most optimistic low inflation expectation over the next decade of 3%.”
Michele is a bit more bullish on fixed income opportunities, including investment grade corporate bonds. “There is still a high degree of confidence that the Fed has enough tools in this cycle to engineer a soft landing,” she says, adding that corporate profitability has been strong.
He also likes municipal debt, which “could be the part of the market that is underappreciated.” Ten-year AAA municipal bonds recently had equivalent taxable yields of about 4%, well above what they were at the beginning of the year.
write to Lawrence C. Strauss at [email protected]
Reference-www.barrons.com