Morningstar - Q2 2023 - 34

Spotlight: Bonds
$120
Morningstar US
Corporate Bond
91.96
EXHIBIT 4
and aggressive-and that banking sector
troubles that sprouted in early March have already
dampened investor sentiment for the global
economy. Even after prices in the futures market
have shifted to predicting that the Federal
Reserve would stop hiking short-term rates sooner
than it did a few months ago, those prices
still implied that the central bank would continue
to hike them as high as 5% by late March and
would keep them there until June. ( EXHIBIT 5 )
By that logic, our Treasury bond's $90 price and
3.6% yield to maturity reflect expectations
that the Fed has proved its dedication to keeping
inflation in check and that the likelihood of
yields going higher, and prices going even lower,
is modest. The optimist would argue that even
if they're wrong and the pessimist is right,
and even if one assumes that yields at that part of
the maturity spectrum were to go up and stay
at 4.6% for years (thus implying no market-driven
appreciation), the bond's newly adjusted
price of $85 means it will have to gain $15 in price
by necessity over the next six years-a nearly
18% price gain from that point-simply in order
to mature.
Do I Have the Right Wardrobe for Sunny Days?
There are plenty of examples beyond Treasury
bonds, of course-many of which offer even
better potential outcomes. Picking the right time
to buy in any sector is a dicey proposition,
however, which is why we almost always suggest
dollar-cost averaging over extended periods.
If one regularly rebalances their portfolio
and already holds enough bonds to match their
goals and risk tolerance, simply waiting for
the market to return to normal before buying
more might be the best option.
We also know that plenty of investors have
shifted their allocations in response to the
market's gyrations, though. Some investors may
have even dumped their bonds, or even
converted entire portfolios into cash at some point.
For anyone in that situation, it's worth taking
a hard look at getting the portfolio back
in balance. K
Eric Jacobson is a director of manager research at
Morningstar Research Services LLC.
Everybody In! Major bond sectors all took the same plunge, making 2022
an unusual year.
100
$120
80
Morningstar US
Core Bond
91.31
Morningstar US
Treasury Bond
90.91
100
60
Morningstar US
Mortgage-Backed
Securities
90.87
40
80
12/1999
12/2005
12/2011
01/2023
Morningstar US
High-Yield Bond
88.99
Morningstar US
Corporate Bond
91.96
Morningstar US
Core Bond
91.31
Morningstar US
Treasury Bond
90.91
60
Morningstar US
Mortgage-Backed
Securities
90.87
40
12/1999
12/2005
Source: Morningstar Indexes. Data as of Jan. 31, 2023.
12/2011
01/2023
Morningstar US
High-Yield Bond
88.99
EXHIBIT 5
Rate Hike Probabilities Futures market prices provide insight into market sentiment.
Probability That the Federal Reserve Will Hike Short-Term Rates to 5% or Higher
Fed Meeting Date
03/22/2023
05/03/2023
06/14/2023
07/26/2023
09/20/2023
11/01/2023
12/13/2023
01/31/2024
03/20/2024
05/01/2024
06/19/2024
07/31/2024
Ease
No Change
Hike
34
Morningstar Q2 2023
Fed Meeting Date
03/22/2023
05/03/2023
06/14/2023
07/26/2023
09/20/2023
11/01/2023
12/13/2023
01/31/2024
03/20/2024
05/01/2024
06/19/2024
07/31/2024
Ease
No Change
Hike
0%
25
Total Probabilities
Note: Data represents the high end of the range for federal-funds rate set by the Federal Open Market Committee predicted by fed-funds futures prices.
Source: CME FedWatch Tool. Data as of March 20, 2023.
50
75
100
Morningstar Bond Indexes' Average Weighted Prices
Morningstar Bond Indexes' Average Weighted Prices

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Morningstar - Q2 2023

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