General
- During the first quarter, the direction of interest rates was volatile — largely influenced by changes to expectations of Federal Reserve (Fed) interest rate cuts in 2024. We remain nimble in bond portfolio allocations and continue to favor the short- and ultra-short-term portion of the curve.
- So far in 2024, most bond portfolios have been able to provide investors with attractive yields. We expect high-quality bonds to provide support to investment portfolios during periods of equity market volatility.
Domestic
- Historically, long-term yields have tended to peak before the end of a Fed tightening cycle, and it appears that this time was no exception. The yield curve remained inverted (it has been so since July 2022) as short-term rates are still higher than intermediate- and long-term rates.
- We believe the Fed has most likely reached its terminal policy rate for this cycle and will likely begin cutting interest rates later this year once inflation allows.
- Credit spreads continued to narrow further during the first quarter of 2024 as credit conditions eased. This has caused valuations in corporate bonds to remain expensive even as issuance increased significantly.
International
- European bond yields moved higher over the quarter as hawkish rhetoric from the European Central Bank (ECB) continued while it attempted to calibrate between inflation and economic growth.
- We expect the ECB to hold policy interest rates near 4.00% during the second quarter. Eurozone bond yields may peak before the end of the hiking cycle.
- Emerging market (J.P. Morgan EMBI Global) spreads also narrowed in the first quarter. Index yields were volatile but ended the quarter almost flat. Still, higher relative yields should attract inflows once we see a clearer turn in U.S. interest rates and the dollar.
JPMorgan Emerging Markets Bond Index Global (EMBI Global), which currently covers 27 emerging market countries. Included in the EMBI Global are U.S.-dollar-denominated Brady bonds, Eurobonds, traded loans, and local market debt instruments issued by sovereign and quasi-sovereign entities.