2024 Q4 Investing Insights (Bonds)

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Hello, and thank you for joining me. I'm Bill Woodruff, and I lead the investing services at Wealthfactor. At Wealthfactor, we are dedicated to helping individuals navigate the complexities of investing with competence by providing clear, actionable insights. In this presentation, I'll share my thoughts on global financial markets with a specific focus on the bond market.

Together, we'll explore the current state of interest rates and evaluate key market dynamics shaping fixed income investments. My goal is to provide an evidence based perspective that empowers you to make informed and strategic investment decisions before we begin a few important disclaimers statements made during this presentation or for informational purposes only and reflect my personal opinions.

These statements are subject to risks and uncertainty, some of which are significant and beyond our control. There's no guarantee that these statements will prove accurate and actual results in future events may differ material from what is discussed. Finally, please note that historical results are not necessarily indicative of future performance.

Let's [00:01:00] begin by examining the performance of fixed income over the last three years. This chart showcases the annual returns for the Barclays Aggregate Index and 5 Year Treasuries from 2022 through 2024, highlighting the impact of interest rate trends on bond markets. In 2022, the fixed income market experienced significant challenges as rapidly rising interest rates caused bond prices to fall across the board.

The Barclays Aggregate Index, which serves as a broad proxy for the bond market, declined by 13%, while 5 Year Treasuries fell by 9. 7%. These losses highlight how rising rates negatively affect bond prices, as newly issued bonds offer higher yields, reducing the value of existing bonds with lower coupons.

In 2023, the market began to stabilize. The Barclays aggregate delivered a total return of 5. 5%, and 5 year Treasuries returned 3. 9%. These returns were primarily driven by interest income with bond prices recovering slightly [00:02:00] as rate volatility decreased. In 2024, returns moderated as interest rates rose further, leading to price declines that offset much of the income generated by bonds.

The Barclays aggregate returned 1. 3 percent and 5 year Treasuries posted a similar return of 1. 2%. This dynamic underscores a key characteristic of fixed income markets. While interest income is a steady driver of returns, changes in rates can significantly impact total performance in the short term.

Let's dive into the dynamics of the fixed income market over the past year. Across the maturity spectrum, shorter term bonds like 5 year Treasuries manage modest positive returns, while longer term bonds such as 10 and 30 year Treasuries face negative returns. This was due to the greater sensitivity of longer maturities to rising rates.

The impact of rate increases outweighed the income generated. Notably, the U. S. high yield bonds performed positively in 2024, reflecting investor [00:03:00] appetite for yield in a still elevated rate environment. However, with the spreads over 10 year treasuries at less than 3%, I view these returns as insufficient compensation for the added risk.

For most investors, equities may offer better opportunities when seeking growth or managing risk budgets, except in cases where income needs are acute. The fixed income market is heavily influenced by shifts in interest rates, and 2024 was no exception. These dynamics highlight the importance of carefully assessing maturity exposures and weighing potential returns against risks.

As we proceed, we'll explore how the yield curve shifted throughout the year and how we might use that information to make informed investment decisions. First, a quick refresher. The yield curve represents the relationship between bond yields and their maturities. In simple terms, it shows the interest rate investors earn on bonds of different lengths, [00:04:00] from short term treasuries to long term ones.

The shape of the curve often reflects market expectations for growth, inflation, and monetary policy. This chart shows the yield curve as of September 30th, 2024. Yields remained relatively stable compared to earlier in the year, reflecting the market's continued adjustment to prior rate increases.

Shorter maturities offered higher yields relative to their historical norms, while longer maturities carried more pronounced interest rate sensitivity. The overall curve reflects the complex interplay between market forces, including expectations for future monetary policy and economic conditions. Now, shifting to the second chart, we see the yield curve as of December 31st, 2024.

This reflects an upward movement in yields across most maturities compared to earlier in the year. Here is a rising yields can create opportunities for investors as higher yields translates into greater interest [00:05:00] income potential for the same level of interest rate risk while extending maturities may feel counterintuitive after recent years of challenging performance.

It's important to recognize that past movements in rates have little bearing on what might happen next. Decisions should instead be grounded in long term objectives and the understanding that higher yields generally provide stronger income opportunities over time. As we wrap up, let's reflect on what we've covered.

In this presentation, we explored the recent performance and dynamics of the fixed income market. We discussed how rising interest rates have shaped returns across maturities and sectors, emphasizing the importance of understanding interest rate risks. We also examined the evolving yield curve and its implications for positioning fixed income exposures in today's environment.

Fixed income markets can feel complex, especially in times of significant rate movements. But by staying disciplined, focusing on diversification, and [00:06:00] aligning investments with long term goals, we can navigate these challenges with confidence. Thank you for taking the time to listen today. If you'd like to discuss your fixed income strategy further or view your broader portfolio, please don't hesitate to reach out.

At Wealth Factor, we're here to provide clarity and guidance to help you make informed decisions and achieve your financial goals. Let's continue the conversation as we navigate the road ahead together.