2019 Bond Market Outlook

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Includes: BIL, CLTL, DFVL, DFVS, DLBL-OLD, DLBS, DTUL, DTUS, DTYL, DTYS, EDV, EGF, FIBR, GBIL, GOVT, GSY, HYDD, IEF, IEI, ITE, OPER, PLW, PST, RISE, SCHO, SCHR, SHV, SHY, SPTL, SPTS, TAPR, TBF, TBT, TBX, TLH, TLT, TMF, TMV, TTT, TUZ, TYBS, TYD, TYNS, TYO, UBT, UST, USTB, VGIT, VGLT, VGSH, VUSTX, ZROZ
by: Charles Schwab
Summary

Although the markets have responded positively to the Fed's message, we still see some risk in the bond market, particularly the corporate bond market due to high levels of debt on balance sheets, slowing economic growth, and a slowdown in earnings growth.

Thus, we continue to suggest moving up in credit quality from the lower-rated bonds.

On the positive side, we think it's less likely that the yield curve will invert, and that's good news for the economy, because an inverted yield curve is often seen as a leading indicator of recession.

Transcript

Kathy Jones: We ended 2018 with a cautious outlook on the bond market. Our biggest concern was that the Federal Reserve's series of interest rate hikes would reduce demand for bonds, especially bonds in the riskier segments of the market, like high-yield bonds; but recently, the Federal Reserve has indicated that they're unlikely to raise interest rates again in the near term. They may hold off for a while. Does that mean we should throw caution to the wind?

I'm Kathy Jones, and this is Bond Market Today.

Although the markets have responded positively to the Fed's message, we still see some risk in the bond market, particularly the corporate bond market due to high levels of debt on balance sheets, slowing economic growth, and a slowdown in earnings growth. Consequently, we continue to suggest moving up in credit quality from the lower rated bonds.

On the positive side, we think it's less likely that the yield curve will invert, i.e., that short-term rates will move above long-term rates if the Fed slows down its pace of interest rate hikes; and that's good news for the economy, because an inverted yield curve is often seen as a leading indicator of recession.

One thing that hasn't changed is our outlook for bond yields. We continue to believe that the peak in 10-year treasury yields for this cycle was hit last fall at about 3.25%, and that for the first half of 2019, we expect yields to be in a range of about 2.5-3%.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.