Fixed income set to shine in 2024 with improved portfolio balance potential

By Newsdesk

December 12 2023
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Investors may see 2024 as a promising year for fixed income, according to insights from Franklin Templeton's top investment experts.

Fixed income set to shine in 2024 with improved portfolio balance potential

Stephen Dover, Head of Franklin Templeton Institute, together with Portfolio Managers Josh Lohmeier and Mark Lindbloom, shared a positive outlook for fixed income markets during a recent discussion.

Dover highlighted the current economic indicators pointing to a potential softening, saying, “Are we getting ready for a soft landing—or something else? The Federal Reserve’s (Fed’s) prior rate hikes are working through the economy, as there are signs of softening in recent inflation, economic and employment data." He noted that the market is pricing in multiple Fed interest-rate cuts for 2024, leaving investors curious about the economy's direction and the Federal Reserve's response.

Both Lohmeier and Lindbloom are leaning toward a soft landing scenario, expecting a slowdown in growth and a retreat in inflation, though perhaps not reaching the Fed's desired 2% level. Interestingly, Lohmeier suggests a stronger-than-anticipated economy led by consumer resilience and forecasts fewer rate cuts than the market. Lindbloom anticipates a slowing economy and agrees on the likelihood of reduced inflation and interest rates.

The conversation also shed light on current opportunities, with Lohmeier and Lindbloom sharing why now appears to be an attractive entry point for investors seeking longer-duration assets. Dover delineated the rationale: “Nominal and real yields appear to be at fair value levels when looking back historically. Inflation appears to be falling. The high correlation between stocks and bonds in 2022 has lessened this year, so the benefits of a mixture of equities and bonds in a portfolio have reasserted themselves in terms of better balancing risk and return.”

Among the discussed strategies, investment-grade securities were heralded as a sensible move from Treasuries, lauded for their low default risk and robust corporate fundamentals. The benefits of municipal bonds were underscored by both portfolio managers for their strong fundamentals and the diverse options they present to investors. Additionally, agency mortgage-backed securities were recommended due to their liquidity, low credit risk, and attractive valuations.

However, a cautious approach to the high yield sector was advised, with a preference for credit selectivity given the current economic cycle phase. Potential idiosyncratic opportunities were recognized, especially for single B rated credits on the verge of an uptick to double B status.

Dover concluded affirmatively, “In sum, the case for fixed income seems quite strong, particularly for investors looking to move some portion of their portfolios out of cash. The correlation between equity and fixed income has dropped, so fixed income can play a valuable role within a balanced portfolio to help reduce overall risk and provide diversification.” He asserted the appeal of agency securities and investment-grade credit for more risk-averse investors seeking reliable allocation destinations.

With the prospects of a diversified portfolio and guarded optimism, fixed income emerges as a compelling option for investors in 2024, potentially offering a safeguard against volatility while enticing with attractive yields.

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