The main factors influencing a bond’s duration are time to maturity and its coupon rate. In general, the longer the time to maturity, the higher the duration. The higher the bond’s coupon rate, the lower the duration, all else being equal. For example:
| ETF | Ticker | Effective Duration | Effective Maturity |
| Vanguard Short-Term Bond ETF | BSV | 2.64 years | 2.80 years |
| Vanguard Long-Term Bond ETF | BLV | 14.13 years | 22.60 years |
An investor in BSV can expect a 2.64% increase in the value of the fund due to a 1% decline in interest rates. Likewise, an investor in BLV could expect a 14.13% increase in the fund as a result of a 1% decline in interest rates. These of are approximations, of course, and don’t include any market or other factors that could influence the price of an ETF over time. Also, duration is an estimate, not a set number.
For clients invested in individual bonds or bond funds, should interest rates decline as many predict, aided by any Fed interest rate cuts, they could experience potentially significant increases in the value of their bonds or bond funds, especially if they are on the longer end of the duration spectrum.
Bond and CD ladders
With interest rates at high levels, this can be a good time to lock in these rates with individual bonds orcertificates where appropriate. Keil, the financial advisor, said that the bond market is telling us to lock in before the Fed starts cutting.
A strategy to consider is building a bond ladder or a CD ladder if that fits into a client’s overall financial planning and investment strategy. Using a ladder allows clients to lock in today’s relatively high rates without worrying about where rates go as long as they hold the bonds or CDs until maturity. While bonds seem to get more press, a recent article by Fidelity indicated that some CD rates are very favorable compared with some riskier bonds.
As each holding on the ladder matures, clients can decide how to reinvest the money. This could be at the longer end of the ladder or elsewhere. In the meantime, clients benefit from the interest earned during the holding period.
While the Fed has indicated that it will be cutting rates, there is no guarantee as to when these cuts will start and how extensive they will be. Experts’ opinions vary on this topic and also on inflation and the overall economy. Both areas can influence the direction of interest rates.
A risk, especially for clients using ETFs and mutual funds to invest in bonds, is to know when rate cuts have run their course. At that point, the risk, especially with longer duration holdings, is that rates could head back up. That could cause a decline in the value of these funds, potentially eroding some or all of the profits made from price increases fueled by declining interest rates.
Most clients likely have a target allocation for bonds and fixed income within their overall asset allocation. While it can make sense to direct some of this allocation to longer duration bonds or other areas that are expected to benefit from falling rates, it’s important to have a plan associated with any of these changes to realize gains and minimize risk. One option, if longer duration bond ETFs are being used, is to use stop orders to minimize the downside potential should rates head back up.
Longer duration ETFs, mutual funds or individual bonds could trigger capital gains when sold after a significant interest rate decline. Planning should take this into account. If there is latitude in a client’s accounts, some consideration should be given as to where to hold these assets in order to minimize the tax hit from these gains. This could also be a factor in portfolio rebalancing over the next couple of years.
The current environment looks very favorable for bonds. Your guidance can help clients benefit from the current situation while not straying from their long-term investment strategy.
FAQs
With rate cuts “on the horizon,” Sanders said, “a lot of the advisors we are talking to are asking whether now is the time to add duration. Unlike the past 15 years or so, you don't need to take on a lot of risk (including duration, or interest rate risk) to earn a decent yield.
Are bonds expected to do well in 2024? ›
As inflation finally seems to be coming under control, and growth is slowing as the global economy feels the full impact of higher interest rates, 2024 could be a compelling year for bonds.
Should I be investing in bonds right now? ›
Answer: Now may be the perfect time to invest in bonds. Yields are at levels you could only dream of 15 years ago, so you'd be locking in substantial, regular income. And, of course, bonds act as a diversifier to your stock portfolio.
Why invest in emerging markets in 2024? ›
The economic fundamentals in emerging markets are also much better than they were 10 years ago. Current account balances have improved, there is less dollar-denominated debt and greater foreign exchange reserves. Developing countries are much better insulated against future shocks.
Should you sell bonds when interest rates rise? ›
If bond yields rise, existing bonds lose value. The change in bond values only relates to a bond's price on the open market, meaning if the bond is sold before maturity, the seller will obtain a higher or lower price for the bond compared to its face value, depending on current interest rates.
Should I buy bonds when interest rates are high? ›
The answer is both yes and no, depending on why you're investing. Investing in bonds when interest rates have peaked can yield higher returns. However, rising interest rates reward bond investors who reinvest their principal over time. It's hard to time the bond market.
What is the downside of investing in bonds? ›
Historically, bonds have provided lower long-term returns than stocks. Bond prices fall when interest rates go up. Long-term bonds, especially, suffer from price fluctuations as interest rates rise and fall.
What is the bond rate in 2024? ›
May 1, 2024. Series EE savings bonds issued May 2024 through October 2024 will earn an annual fixed rate of 2.70% and Series I savings bonds will earn a composite rate of 4.28%, a portion of which is indexed to inflation every six months. The EE bond fixed rate applies to a bond's 20-year original maturity.
Do bonds go down when stocks go up? ›
In theory, rising stock prices draw investors away from bonds, causing bond prices to drop, as sellers lower prices to appeal to market participants. Since bond prices and bond yields move inversely, eventually, the falling bond prices would push the bond yields high enough to attract investors.
What will happen to the economy in 2024? ›
The U.S. Economy
Economic growth slows in 2024 as unemployment increases, partly as a result of tight monetary policy. Real (inflation-adjusted) GDP growth accelerates in 2025 after the Federal Reserve responds to weaker economic conditions in 2024 by lowering interest rates.
For the world as a whole, growth is projected to edge up from 3.1% in 2023 to 3.2% in 2024 and 3.3% in 2025. This is a marginally upward revision compared to the Winter Forecast. The growth outlook for the US looks better than previously expected, mainly on account of the strong end-of-2023 performance.
What are the stock market predictions for 2024? ›
The Big Money bulls forecast that the Dow Jones Industrial Average will end 2024 at about 41,231, 9% higher than current levels. Market optimists had a mean forecast of 5461 for the S&P 500 and 17,143 for the Nasdaq Composite —up 9% and 10%, respectively, from where the indexes were trading on May 1.
What is the financial market outlook for 2024? ›
We expect monetary policy to become increasingly restrictive in real terms in 2024 as inflation falls and offsetting forces wane. The economy will experience a mild downturn as a result. This is necessary to finish the job of returning inflation to target.
Is there a high yield outlook for 2024? ›
High yield spreads have tightened considerably over the past several quarters. As of March 31, 2024, the BofA ICE US High Yield Index's (the “Index”) spread-to-worst was 332bps, significantly lower than the 20-year median of 454bps and at the low end of the post-GFC* general “non-panic range” of 350-550 bps.
