Webinar

Fall 2024 Post-Election Webinar

Gauging the market impact of election results.

Key takeaways

  • Beginning in October 2024, a long trend of declining interest rates reversed course.

  • In a matter of weeks, yields on the benchmark 10-year U.S. Treasury, which dropped to near 3.6% in September, jumped more than 0.80%.

  • Investors may want to reexamine the role bonds play in their diversified portfolios considering current interest rate dynamics.

A months-long trend of declining long-term bond yields, in anticipation of Federal Reserve short-term interest rate cuts, reversed course in mid-September. On September 16, the benchmark 10-year U.S. Treasury note yield reached its 2024 low point at 3.63%. This occurred just in advance of the Federal Reserve (Fed), for the first time in four years, cutting the federal funds target rate (the rate banks charge each other for overnight loans). At its meetings in September and November, Fed policymakers dropped the fed funds target rate by a total of 0.75%. Over that same period, the 10-year Treasury yield moved in the opposite direction, rising as much as 0.80%.1

Chart depicts 10-year Treasury yields in 2024: January 2 - November 22.
Source: U.S. Bank Asset Management Group, Bloomberg as of November 25, 2024.

Other longer-term bond yields moved higher as well, as did mortgage rates. Year-to-date bond market total returns, as measured by the broad Bloomberg U.S. Aggregate Bond Index, topped 5% in September before the bond yields reversed course and moved higher (when yields rise, bond values decline). As of November 22, 2024, the index’s year-to-date total return slipped to 1.52%.

The yield declines that occurred before mid-September priced in anticipated Fed actions. Once the Fed initiated rate cuts, the market’s focus changed, according to Rob Haworth, senior investment strategy director for U.S. Bank Asset Management. “The market’s higher yields are now pricing in better economic growth, but we’re not seeing higher inflation expectations, which is often what triggers an interest rate upturn.” Haworth says in many ways, this is a positive sign. “It tells us that people are employed and have growing incomes. However, that might slow the Fed’s plans to cut short-term rates.”

“The market’s higher yields are now pricing in better economic growth, but we’re not seeing higher inflation expectations, which is often what triggers an interest rate upturn.” says Rob Haworth, senior investment strategy director with U.S. Bank Asset Management.

The economy is on a positive trajectory and inflation dropped significantly. Gross Domestic Product (GDP) growth, on an annualized basis, was 1.6% in the first quarter, 3.0% in the second quarter and 2.8% in the third quarter.3 Inflation, which peaked at more than 9% in mid-2022, now stands at 2.6%.4

The Fed, as it considers its monetary policy, is trying to find a sweet spot, driving inflation lower without slowing the economy to the point that it causes a recession. So far, the Fed has achieved this so-called “soft landing.”

Higher government deficits, occurring in conjunction with elevated interest rates, require the U.S. Treasury to increase debt supply to fund federal government spending. Haworth says to this point, deficit concerns have not greatly contributed to rising Treasury yields.

 

The yield curve is (nearly) flat

For more than two years, an unusual environment persisted. The yield curve, reflecting yields across the Treasury security maturity spectrum, is typically upward sloping (see the line in the chart below representing the yield curve as of Dec. 31, 2021). In a normal environment, the shortest-term securities offer the lowest yields, and those with the longest maturities pay the highest yields. However, in 2022, the yield curve inverted as short-term rates rose dramatically, exceeding long-term yields (see the line on the chart showing the yield curve on June 30, 2023). In recent months, the market began shifting and today, the difference in yields between short-term and long-term bonds is marginal (see the line representing the yield curve on Nov. 25, 2024).1 “Today’s relatively flat yield curve (with very little variation in yields across the spectrum) reflects the transition period we’re in as the Fed alters its interest rate policy,” says Haworth. Ultimately, we should return to a normal sloping yield curve.

Chart depicts U.S. Treasury yield curve change comparing 2021 to 2024 as of 12/31/2021 and 10/29/2024, respectively.
Source: U.S. Bank Asset Management Group, U.S. Department of the Treasury, as of November 25, 2024.

Finding opportunity in the bond market

How should investors approach fixed income markets today? Investors may wish to modestly underweight their fixed income position within portfolios that mix stocks, bonds and real assets. “This reflects our expectation of lower relative near-term returns from investment grade bonds,” says Haworth. “It indicates that given the current level of economic growth, other assets may be better positioned to generate higher returns.”

Investors may want to take advantage of specific bond market opportunities, taking into account their risk tolerance and tax situation. For example, investors in high tax brackets may benefit by extending durations slightly longer and including an allocation to high-yield municipal bonds as a way to supplement their investment grade municipal bond portfolio. Some non-taxable investors may benefit from diversifying into non-government agency issued residential mortgage-backed securities. And, for certain eligible investors, insurance-linked securities may offer a way to capture differentiated cash flow with low correlation to other portfolio factors.

Talk to your wealth professional for more information about how to position your fixed income investments as part of a diversified portfolio.

Frequently asked questions

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Disclosures

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  1. Source: U.S. Department of the Treasury, Daily Treasury Par Yield Curve Rates.

  2. WSJ.com, based on year-to-date total return as of November 22, 2024.

  3. Source: U.S. Bureau of Economic Analysis.

  4. Source: U.S. Bureau of Labor Statistics.

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Investments in fixed income securities are subject to various risks, including changes in interest rates, credit quality, market valuations, liquidity, prepayments, early redemption, corporate events, tax ramifications and other factors. Investment in fixed income securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term securities. Investments in lower-rated and non-rated securities present a greater risk of loss to principal and interest than higher-rated securities.

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