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There’s good news for fixed-income investors heading into next year, according to Goldman Sachs Asset Management. After a dismal 2023, next year will be “the year of the bond,” predicted Lindsay Rosner, head of multi-sector fixed income investing at the money manager. “Fixed income is a great place to be,” she said in an interview with CNBC. The investment firm recently released its outlook for 2024 and called the recent run of negative fixed income returns in response to “an inflation and policy shock,” an anomaly and not the trend. “Following a reset higher in bond yields, the age of ‘There Is No Alternative’ (TINA) to equities or other risk assets has ended. We believe we are now in the early phases of ‘There Are Reasonable Alternatives’ (TARA),” Goldman wrote. Bond prices tumbled after the Federal Reserve started hiking interest rates in early 2022. Since prices move inversely to yields, that has provided an opportunity for investors to snap up additional income. Investors are now earning yields of 4% to 6% by buying bonds from high-quality companies, twice the 2009-2019 average, according to Goldman. More recently, the tide has started to turn, with Treasury yields falling in November and prices moving higher as traders grew increasingly confident the Fed is done raising rates to contain inflation. Goldman shares that belief. That means the risks fixed-income investors faced,from duration , spread widening or defaults , are less of an issue, Rosner explained. “Duration was really painful over the past 18 months and truly the entire hiking cycle,” she said. “We have gone to the other side of it and we are now in a very comfortable position from a duration perspective” She also believes default rates will be average or lower than average and there won’t be a lot of spread widening that will erase the total return calculation. How to play it The ending of the Fed’s rate hikes is good news for intermediate-term investment-grade corporate and government credit, according to Goldman. The assets have notably outpaced Treasurys on average in the last 12- and 24 months after each of the last four rate-hike cycles, the firm wrote in its outlook. With that in mind, Rosner believes it’s time to move out of cash and short-term assets and start extending duration. Investors should also be thoughtful and remain high quality since rates are expected to remain higher for longer, she said. The best way to do that is through active management, since there will be very different outcomes depending on the companies and countries, and the health of their balance sheets, she said. “Big picture, we think you are really paid to be in high quality products — a mix of Treasurys, investment grade, high-quality structured products,” Rosner said. “We are at this unique place where you can get real yield in high-quality assets,” she added. “Given [that] duration can be your friend again, things are lining up to put you in a really good position in fixed income.” — CNBC’s Michael Bloom contributed reporting.
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