The fixed income markets have bounced back from their recent decline, and a strategist thinks there may be more gains to come. Most certainly, the Federal Reserve will no longer raise interest rates, which will remove the largest obstacle for bond investors. Leading into the new year, Lawrence Gillum, chief fixed income strategist at LPL Financial, outlined four reasons for confidence in the fixed income market.
First, the largest obstacle to fixed-income markets should be removed with the conclusion of the Federal Reserve‘s rate-hiking program. Second, the asymmetric risk-return profile of bonds is a benefit, partly because of the larger “yield cushion” that can counteract rising interest rates. Third, bond investors might see gains comparable to equities without the associated risks. The 10-year Treasury is expected to trade between 4.25% and 4.75%, according to LPL Financial‘s base case. However, if rates continue to decline, fixed-income assets may see high single-digit or low double-digit returns over the course of the next year. Finally, the current fixed-income market will allow income-seeking investors to start making money again without having to “reach for yield”—that is, take on a lot of risk—in order to meet their income requirements.
