The bond market in 2024 continues to exhibit topsy-turvy dynamics, with yields on short-term bonds exceeding those of some longer-term bonds. For example, as of May 3, 2024, 3-month Treasury bills yielded 5.45% and 2-year Treasury yields were 4.81%, compared to the 4.50% yield on the 10-year Treasury.3 The Fed is keeping the door open to potential federal funds target rate cuts later in the year, but investors should still prepare for the possibility that the timeline for the start of Fed rate cuts may be pushed further out.
The current bond yield environment emerged after the Fed began raising the fed funds target rate in early 2022. Between March 2022 and July 2023, the Fed raised rates eleven times, from near 0% to an upper range of 5.50%. The Fed’s actions were designed to temper what had been an inflation spike. Since July 2023, the Fed has held the line on further rate hikes.
“If the Fed cuts short-term interest rates, yields on shorter-term debt issues are likely to decline,” says Haworth. “The upward movement we’ve seen in bond yields this year reflects markets getting well ahead of expectations for 2024 Fed rate cuts,” says Haworth.
What should investors expect from the bond market for the remainder of the year and what does that say about how to incorporate or adjust strategies for fixed-income investors?
Changing bond market
Despite the recent decline in bond yields, they remain significantly higher than was the case at the start of 2022. “Three key factors drove the jump in bond yields,” says Bill Merz, head of capital markets research at U.S. Bank Wealth Management. “First is the Fed’s policy response to inflation. Second is the strength of the U.S. economy. Finally, there is an increasing supply of U.S. Treasury securities coming to the market.”