During today's FOMC policy statement and interest-rate decision, the Federal Reserve raised interest rates by 25 basis points or .25%. Fed Chairman Jerome Powell indicated another rate hike this year before pausing.
Looking at the chart of BND, Vanguards Total Bond Market ETF, we can see that due to the rapid and successive hikes in 2022, bonds, which move inversely to interest rates, have reached historic lows after a significantly abysmal year last year. With the Fed finally indicating that the hikes have an end in sight, it might be the tie to ask yourself whether or not bonds have a place in your portfolio.
From a fundamental perspective, bonds, which once again move inversely to interest rates, appear to have a bullish case should the rate hikes desist. Markets, which have a way of anticipating and subsequently pricing in known and unknown information, seem to be confirming this belief with bonds bottoming in October. Price action is a leading indicator.
From a technical standpoint, there’s bullish price action off of the October lows as we look at the monthly chart of BND in the figure above. Bonds are at multiple-decade lows, at prices not seen since the 2008 subprime mortgage crisis. That era resulted in a friendly monetary policy that carried BND higher for another 12 years. After 9 hikes in 2022 and more in 2023, it isn’t hard to imagine an environment where interest rates move lower and bonds move higher.
The traditional 60/40 stock/bond portfolio had its worst year on record in 2022. Will 2023 revert to the mean? If so, bonds may be worth a look for discerning investors.