At least in one corner of the market, it looks like amateurs are once again outsmarting the pros.
Most large asset managers and banks clearly believe bonds will make a comeback this year. If this sounds interesting, then yes, we've heard this before. No, it didn't really work because bonds' nemesis: inflation persisted. But for 2025, the message is clear: central banks are cutting interest rates and you won't see yields like these again. Take out the cash, buy the bond and lock in the interest rate.
The year has just begun, and it would be unwise to read too much into the ebb and flow of the market at the beginning of the year. But to make matters worse, the sharp rise in bond prices predicted by many large asset managers and investment banks in 2024 has failed to materialize, and so far, as one professional bond investor put it to me, 2025 has been “a year of uncertainty.” People are troubled”.
Bond prices fell again as market participants not only gave up on expectations that the Federal Reserve would cut interest rates further to support bonds, but also swung in the opposite direction. Bank of America analysts said in a note following the recent "robust" U.S. jobs report that "rate cuts are inevitable in 2024." Now, the bank believes the Fed will remain unchanged for a long time, but the conversation is "changing." . . Go hiking”.
This was awkward for the "Bonds Return" crew. In a mid-December report, bond giant Pimco's Richard Clarida, a former senior Fed official, and Mohit Mittal Together they highlight the case for buying bonds and selling cash.
"The market landscape has changed," they wrote at the time. “Now that the Fed is on the path to lowering rates, overallocation to cash creates reinvestment risk as assets quickly and repeatedly convert into lower-yielding versions. . . . Relative to cash, as interest rates fall, so do yields On the decline, bonds offer more attractive opportunities."
I don't want to argue with Pimco about the bonds, which is probably the right thing to do in the long run. That's huge consensus among big banks and investors - nearly all of them tracked by Natixis Investment Managers recommend avoiding cash this year. But the volatility in early 2025 doesn't help, and some (relatively) amateur investors aren't convinced anyway.
“The big bond houses are saying now is a good time to buy bonds,” said Norman Villamin, chief strategist at Union Bancaire Privée Group. "But our customers are smart. They say 'Why would I do this?'"
Villamin said his clients - often wealthy individuals and families - are still very happy to keep a large portion of their portfolios in cash, paying interest rates of just under 5% a year in the U.S. and 5% a year in the euro zone The interest rate paid on deposits remains 3%. That's still a huge win for investors who remember their emergency fund interest rates were around zero.
"The risk that people need to be aware of is their bonds," Villamin said. "Bonds are not pricing in the new inflationary environment."
This obviously all depends on the investor's time horizon. If you're willing to park your money for 10 years, the bond yields on offer are once again very generous by the standards of past decades. If you might need to dip into your savings sooner, there's a significant risk that bond prices will fall, and cash is your friend. (Another Swiss private banker explained to me a few months ago that his wealthy clients never know when they might want to buy a new home or another yacht. I nodded. The struggle is real.)
Bonds shouldn't be a sexy part of an investor's portfolio by any means - their role is to provide steady income and provide a counterweight to fierce stocks, which are set to do quite well in 2024, especially in the US.
Still, the market has yet to adapt to the new paradigm. Inflation can erode a bond's interest payments and overall returns over its life, but it hasn't been completely defeated yet.
Cash experts are pleased to note that the money is still pouring in despite many predicting it would come as the Federal Reserve begins cutting interest rates.
“We don’t believe that as yields fall, investors are rushing to allocate all their cash to stocks and bonds,” said Deborah Cunningham, chief investment officer of global liquidity markets at Federated Hermes. She said, If the Fed's final interest rate, its long-term target, hovers around 3.5%, many people will be very happy, especially those who use cash primarily as a vehicle to pay expenses and other needs. "We think the (cash) industry needs to make room to fly another flag this year," she said.
Of course, as usual, we see here the competing worldviews of stakeholders. Still, while bonds have been on a bumpy ride, cash is proving far stickier than most asset managers expected for years. This is a hard habit to break, and if you're still expecting that cash to flow into riskier asset classes, you may want to wait a while.
katie.martin@ft.com