[1] Bonds yields to nominal GDP growth ratio of 0.9X for the US and UK, 0.8X in the euro zone
[2] Recovery rate is assumed to be 40 per cent for developed market high yield bonds and emerging market hard currency debt; 50 per cent for emerging market local currency debt
[3] Our currency model is based on purchasing power parity and incorporates a country's relative productivity and its net foreign asset position -- or the difference between the amount of foreign assets a country owns and the amount of domestic assets held by foreigners.
A bond revival beckons in 2024
Bond investors have reasons to be optimistic as the new year approaches.
Written by
Arun Sai
Senior Multi Asset Strategist
Fixed income investors spent most of 2023 enduring severe bouts of market volatility as central banks hiked interest rates aggressively.
Conditions should become less fraught next year. According to our forecasts, bonds should deliver above-average gains in 2024, thanks to higher coupon income, weaker nominal GDP growth and a gradual shift in central bank monetary policies towards modest easing.
Our projections take into account several economic and technical factors. The primary inputs are our projections for GDP growth, inflation and official interest rates.
Our forecasts assume the global economy will grow 2.3 per cent next year, below its long-term potential and down from 2.5 per cent in 2023.
Most of that slowdown will stem from weakness in major developed economies, especially the US and China, while emerging economies as a whole will deliver stronger growth.
As growth slows, so too will inflation.
Globally, we expect inflation to fall to 4.6 per cent in 2024 from this year’s 5.5 per cent. We also see inflation in the developed world falling to 3.0 per cent from this year’s 4.7 per cent, allowing the US Federal Reserve and the European Central Bank to start cutting interest rates by mid-2024, albeit by less than the market currently discounts.
The UK is likely to see its inflation more than halve to 2.5 per cent from this year’s 7.4 per cent, potentially enabling the Bank of England to become the first major central bank to cut interest rates next year; we expect UK base rates to fall by 75 basis points in 2024.
Rising price pressures are likely to be persistent in emerging economies; China’s inflation will rise to 2 per cent from 0.4 per cent in 2023.
Bond revival
Forecast return for 2024, %, by fixed income asset class, in local currency terms unless stated otherwise
Once our economic and rate forecasts are calculated, we apply a discount based on a fundamental analysis of each fixed income asset class.1 We then incorporate estimates for the annual roll yield – or the return from adjusting a futures position from one futures contract to a longer-dated contract.
For emerging market sovereign and corporate bonds, the return forecasts are based on fair value models of the corresponding spreads and expected recovery rates in the 40-50 per cent range depending on the index.2
We run these calculations for all the major bond asset classes.
As shown in Fig. 1, UK and US benchmark government bonds are likely to outperform other developed market peers; emerging local currency bonds are likely to be the overall winner with an expected return of more than 12 per cent in US dollar terms. This incorporates our forecast for the dollar to weaken more than 4 per cent against a basket of currencies in 2024.3
Emerging market dollar denominated debt debt should also outperform given that its current yield stands at 9 per cent, the highest in the sovereign bond market and some 200 basis points above its 10-year average.
Japan is the only market which will a deliver capital loss, according to our forecasts; returns for Swiss government bonds are expected to anaemic at just over 1 per cent. Both Japanese and Swiss government bonds are low-yielding markets where the outlook for annualised return after inflation – or real yields -- is negative.
more on bonds
The investment landscape in 2024
US stocks look set to trail European and Swiss equities in a year that will also see bonds gain in response to slower growth.
December 2023
Whether the landing's hard or soft, bonds look good
Yields on government bonds and corporate credits are generous enough to protect investors against considerable market volatility
September 2023
Fixed income through the investment cycle
There are fixed income assets for every economic scenario.
October 2023
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