Who says bonds can't be flashy?
If another recession comes to a close, investing in the nearly $24 trillion U.S. Treasury market and other forms of government-backed debt could be a good bet next year, according to Truist Advisory Services.
The team examined the past four U.S. recessions and found that investors who avoided going out on a big limb by investing in bonds backed by the American government see chart reaped relatively high returns.
In the past four recessions, the returns on government-backed debt beat out the returns on investment-grade and high-yield junk bonds, where investors tend to be paid more to take on credit risks, including the threat of rising corporate defaults in a faltering economy.
That contrasts with the lower yields generated by Treasurys and agency mortgage-backed securities, which are lumped together into the risk-free category, because default risks would be covered by U.S. government backing, even though interest-rate risks aren't.
During economic slowdowns, both investment-grade and high-yield corporate bonds have underperformed U.S. government bonds, wrote Keith Lerner, co-chief investment officer, and the Truist strategy team in their 2023 outlook.
Given our expectation of decelerating growth next year, we recommend an up-in quality bias for fixed-income allocations entering 2023. After a historically bad 2022, yields across the U.S. fixed-income have recently climbed to their highest level in nearly a decade as the Federal Reserve has fired off rapid-fire rate hikes to attack high inflation levels.
The 10 year Treasury rate TMUBMUSD 10 Y, topped 4% in October but has fallen to about 3.6% on Monday, while the shorter 2 year TMUBMUSD 02 Y counterpart was near 4.4%. The yield curve inversions are a sign that a U.S. recession is imminent, according to investors.
Consumer spending, a roaring labor market and strong wage gains, all of which could keep inflation elevated and cause the Fed to get more aggressive in raising rates than originally anticipated, which is what's clouding the economic picture.
The economy has never been so unloved, according to Bob Schwartz, senior economist at Oxford Economics, in a Friday client note, saying that despite a robust job market and continued strength in consumer spending, the economy has never been so unloved as it is now, despite a record number of economists expecting a recession in the next 12 months. U.S. stocks posted their worst daily drop in a month on Monday, fearing that the Fed may need to stay aggressive in its hikes to tamp down inflation against the backdrop of a roaring labor market. The Dow Jones Industrial Average DJIA lost 1.4%, and the S&P 500 SPX lost 1.8%, ending at 3,998. The Nasdaq Composite Index COMP fell 1.9%, according to FactSet.
The S&P 500 is expected to keep within the range of 3,400 to 4,300 next year, which is consistent with the average annual spread of 27% between a market high and low since 1950.