As we enter 2023, the bond market is under increased scrutiny as investors seek safety and yield in uncertain times. Vanguard recently released its January 2023 investment and economic forecasts, and there are some interesting projections that all investors should be aware of. With cracks starting to emerge in junk bonds, investors may be better off with investment-grade debt now yielding an attractive 5%. The apparent peak in interest rates makes us more positive on equities while an imminent economic slowdown should provide support for bonds.
Pension funds, hedge funds, family offices, banks and other institutions are eager to invest in assets uncorrelated to losing stocks and bonds. They're seeking yield in high-grade investment like government bonds, corporate bonds, and other less risky investment. More than half of taxpayers who receive refunds decide to save or invest the money, according to a 2022 survey by Lendingtree. Bond markets are set to see an additional boost as the Federal Reserve is expected to raise interest rates by at least 25 basis points next year.
Treasury bonds paid out much more than usual this year. That's great for investors, but could spell trouble for the government. With the economic outlook still uncertain, the bond market is likely to remain volatile. October capped their worst 12-month period ever, and the economy is under pressure. Yet the fundamental math of bond returns bodes well for investors: yields will remain elevated, and the risk of holding bonds has decreased significantly.