Vanguard Predicts Bonds To Make Strong Comeback: 'Short-Term Pain Can Lead To Long-Term Gain'

After two years of negative returns, the bond market is experiencing a revival, and the credit goes to the Federal Reserve, as per Vanguard‘s analysis.

What Happened: In their Wednesday note, Vanguard, the investment management company, has attributed the recent positive turn in the bond market to the Federal Reserve’s actions, reported Business Insider.

The firm’s strategists suggested that the Fed’s future rate cuts are prompting markets to believe that the historic rate-hiking cycle has concluded, implying an increase in bond prices and higher total returns over time.

“Short-term pain can lead to long-term gain,” the note read.

Vanguard expects the Federal Reserve to initiate policy easing in the second half of the year. The firm also noted that central banks’ reduction of their bond-buying programs could lead to a decrease in liquidity and an increase in the risk premium. This, in turn, would necessitate a higher yield as compensation for the risk of interest rate changes over the bond’s lifetime.

According to Vanguard’s internal models, Treasurys are currently close to fair value, a scenario that differed significantly from two years ago. The firm’s strategists also indicated that longer-term bonds may be slightly undervalued, suggesting that the rise in interest rates is the most favorable development for bond investors in two decades.

Why It Matters: The recent behavior of the bond market, which has been likened to meme stocks, is also influencing the equities market. Stocks are now responding to movements in the bond market following a substantial drop in yields over the past two months. This development has sparked a rally in the S&P 500 and Nasdaq, highlighting that the bond market is currently playing a significant role.

Notably, Jordan Belfort, famously known as the Wolf of Wall Street, recently advised individual investors to ignore the advice of experts, including financial analysts and TV hosts, to avoid paying unnecessary fees, commissions, and increasing tax liability.

Bonds Photo by Funtap on Shutterstock

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