US Bond Market Poised for Further Growth


The U.S. bond market’s robust rally in the fourth quarter is expected to continue, even if the Federal Reserve takes a gradual approach to cutting interest rates, according to a report by Janus Henderson Investors.

In late 2024, Fed Chair Jerome Powell indicated plans to shift towards rate cuts. This announcement caused the benchmark 10-year Treasury yield (BX:TMUBMUSD10Y) to retreat by more than 1% from its peak of 5% in October, spanning a period of 16 years.

The decline in benchmark rates had a positive impact on the overall bond market. The Bloomberg US Aggregate Bond Index (AGG), also known as “AGG,” recorded a notable gain of 5.5%, as stated by Janus Henderson. In contrast, the AGG experienced a 13% drop in 2022 due to the market turbulence caused by the Fed rate hikes.

Midweek, U.S. stocks experienced a significant decline following the release of January’s consumer-price index, which highlighted that inflation is still some distance away from the Fed’s annual target of 2%. Consequently, this could potentially delay rate cuts.

For investors currently holding “cash-like” investments that yield approximately 5%, the recent resurgence in bonds serves as a reminder of the potential disadvantages of remaining on the sidelines for an extended period.

A Closer Look at Past Fed Rate-Cutting Cycles

Since the 1990s, the Federal Reserve has conducted several rate-cutting cycles. According to Janus Henderson, the average return on T-bills, specifically Treasurys maturing in a year or less (BX:TMUBMUSD01M, BX:TMUBMUSD03M, BX:TMUBMUSD06M), was 3.65% in the year following the initial interest-rate cut. In comparison, agency mortgage-backed securities yielded an average return of 6.85%.

Money-market funds, which recently held approximately $6 trillion in assets as of February 14th, experienced a slight decrease from their record-high levels. This information comes from data provided by the Investment Company Institute.

Janus Henderson portfolio managers emphasized the importance of time in the market rather than timing the market itself. In their market outlook, they explained that despite current higher yields, money-market yields and returns are expected to decline once the Federal Reserve initiates rate cuts.

Weekly Stock Performance

Despite the Dow Jones Industrial Average’s significant drop of over 500 points on Wednesday, stocks were generally heading towards weekly gains. According to FactSet data, the Dow was on track to achieve a 0.4% increase for the week, while the S&P 500 index showed a 0.2% gain, and the Nasdaq Composite experienced a 0.6% decline.

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