Wealth Outlook 2024 - Slow then grow

48 Wealth Outlook 2024 | Portfolio views Peak rates equals peak income: extend duration Considerations: • Barring a surprise inflation scare, the US Federal Reserve (Fed) hiking cycle appears to be at its end. • Present yields for all bonds are historically high and build in significant “real yield” premium over expected inflation. • If unemployment rises in 2024, the Fed is likely to cut rates. This prospect of appreciation adds to the appeal of adding intermediate-termUS dollar (USD)-denominated bonds to portfolios. • Potential opportunities include intermediate-maturity US Treasurys, investment grade credit and municipal bonds. While US Treasurys do not have credit risk, it is possible for investors in Treasurys to experience losses if interest rates rise above their initial purchase level and the investor subsequently chooses to sell prior to maturity. Investment grade rated corporate and municipal bonds have this interest rate risk, as well as the credit risk of the issuer. • Suitable investors may consider fixed income exposure in higher credit quality bonds averaging an intermediate maturity. Various maturities have different purposes in diversified portfolios. Use higher yields to seek portfolio income This past year, most US Treasury and credit indices suffered losses as the Fed continued to raise its policy rate. Credit indices, in contrast, performed substantially better as the economy was stronger than expected, and credit spreads tightened during the year. These credit spreads, when added to higher underlying Treasury rates, combined for a powerful “income effect” from corporate bonds due to higher starting current yields. Credit benefits from spread tightening also offset some of the mark-to-market losses from Treasury rates moving higher. We believe the currently high level of Treasury yields, particularly when combined with high-quality credit, can add substantial and durable income to suitable diversified portfolios. Current yields are well above expected headline inflation (as measured by Treasury Income-Protected Securities, or TIPS). This means that investors can lock in “real” income. We estimate this post-inflation income to be roughly 225 basis points for 5-year Treasurys alone above the current (2.23%) rate of expected headline inflation as of November 24, 2023. This is one reason we believe that core portfolios are a strong investment. (See Core portfolios could be ready to shine on page 34 ) .