Finding Some Zen in a Garden of Volatility

In 2022, rapidly rising interest rates led the U.S. bond markets to their worst performance in contemporary history. In 2023, wild swings in interest rates cut a broad swath across the bond markets. In 2024, there is a veritable army of fixed income professionals desperately pleading with their preferred market deity for just a little bit of peace and quiet. And thus far, the bond markets have been seemingly well-behaved, if tilted towards weakness. Three months in, 10-year yields at 4.37% and 2-year Treasury yields at 4.70% are both higher by 0.50% and are trading near their highest since November. As it turns out, 2024 is off to the fourth-worst start in the last three decades! The fact that many market participants seem unconcerned is a testament to just how volatile the last two years have really been.

Our thesis for 2024 was that the bond markets would be largely range bound in 2024, though 6–8 week trading trends would extend further than purely economic or policy fundamentals might suggest. So far, that theme is playing out, and yields have moved from the low end of our expected trading range to the high end. The catalyst for this move has been (noisily) elevated inflation readings, which have in turn convinced markets to be more circumspect about 2024 Federal Reserve (Fed) rate cuts. Essentially, markets have swung from an extreme of pricing in six rate cuts to a “neutral” of pricing in between two and three. Current pricing offers the first good entry point to add duration in fixed income portfolios since 2023.

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