2022 was arguably the worst-ever year for U.S. bonds. A renowned financial analyst and a leading professor at Santa Clara University, Edward McQuarrie, said: “2022 was the worst year over the past 250 years.”
He also said that if you look back at the history of U.S. bonds, you will see every year better than 2022. The bonds hit record lows, especially the long-term ones at rock bottom.
But 2022 is now over; the most recent survey by U.S. federal officials has shown record job creation in December and a steady rise in the wage rate. The signs are prominent that inflation will significantly go down.
2023 is Showing Positive Signs So far, It Seems like a Good Year for U.S. Bonds
According to experts, macroeconomic indicators are positive, inflation seems to the calming down in 2023, the wage rate growth is steady but persistent, and job creation is on the rise.
All these indicators show that the U.S. economy is in the right direction to achieve much-needed stability. This will give USD more strength as compared to the other currencies.
In addition to that, the U.S. Federal Reserves are fully committed to further increasing the interest rates. But this increase will be steady, which means the impact of this interest rate hike would be very minimal on U.S. bonds.
Lee Baker, the head of Apex Financial Services, said, “as compared to rapid and most frequent interest rate hikes in 2022, the expected price hike in 2023 would not even be half.”
Going from 0% to straight up to 4% is crushing for the bonds and the entire economy. This would not be the case in 2023.
In 2023 The Entire Economic Scenario is Different
A renowned financial analyst, Cathy Curtis, the CEO of “Curtis Financial Planning,” argued that there is no indication of the Fed going up to an 8% interest rate hike in 2023. The market is not heading towards that.
Earlier in December 2022, the representatives of the Fed said that the interest rate might be cranked up by 5.1% in 2023. But this situation is fairly behind us, Cathy also added.
Bonds and other “fixed income” commodities are entering the ideal period of 2023. They are perfectly positioned to give a high return on investment, even higher than they offered in 2021.
Important Things to Consider About Bonds before Making Any Investment
Experts are confident that bongs will give higher returns than any other investment. Experts have warned investors not to overlook bonds, considering their performance in 2022.
Top-ranked experts have advised investors to go with a 60/40 portfolio strategy in 2023. A portfolio should consist of 60% of stocks and 40% of bonds.
This means bonds will, as usual, serve as the medium for recovery when the prices of stocks decline. In 2023, the 60/40 strategy would outperform 70/30.
Moreover, experts argued that the future of interest-rate hikes is always uncertain as it depends on the market circumstance.
As of now, it is clear that the Feds don’t see any reason to increase the interest rate. So, most financial experts advocate for investors to go short on bonds. This will offer less exposure against an interest rate hike.
Curtis said that holding a short-term position over bonds is the ultimate step for strong gains on bonds.
She also added that this is the best time to invest in typical bonds with an intermediate term. According to Curtis, investment in AGG bonds can be highly profitable as things stand now.
The reason that experts are not favoring going long over bonds is simple; long-term bonds got tangled the hardest in 2023.
Holding the bonds for the long term makes them more sensitive and vulnerable to inflation, high-interest rates, and unemployment.
Although 2023 is far more stable and ideal than 2023, not a single economic expert has claimed that 2023 will remain stable throughout its end. That is why experts are not favoring the long-term position on bonds.