Bonds expected to be the best-performing investment in 2024

Professional investors expect bonds to be the best-performing asset class in 2024, with high yields and rising bond prices set to reward investors.

Bank of America’s latest fund manager survey found that investors moved to their biggest fixed income overweight since March 2009.

In total, 94% of investors surveyed said that bonds, stocks, and commodities would outperform cash next year. The survey took place between 3 November and 9 November and covered investors with around $554 billion (£443 billion) in assets.

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The reason for the optimism is that central banks have likely stopped increasing interest rates, and inflation is showing signs of returning to normal levels.

US inflation figures this week showed that prices in the world’s largest economy grew just 3.2% on an annualised basis in October, lower than the 3.3% expected.

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UK inflation figures also beat expectations, with prices rising 4.6% in the year to October 2023, lower than the 4.8% expected.

A slowdown in inflation in the US and UK has prompted strong stock and bond market rallies, with US shares rising 2% this week, in dollar terms, and UK shares increasing 2% as well.

US and UK 10-year bonds yield 4.45% and 4.15%, and with lower interest rates expected to boost bond prices, they are set to deliver strong total returns for investors, with riskier bonds offering even greater return potential.

Bonds should also rally in the event of economic growth shocks, as investors will be drawn to the stable income on offer, particularly from the safest bonds like those issued by the UK and US governments.

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Now, Bank of America finds that 76% of respondents believe the US is done increasing interest rates, and around three-fifths expected bond yields to fall, which is a result of prices rising.

Reflecting investor optimism, investor cash balances fell to 4.7% in October compared with 5.3% in September, according to Bank of America.

This is a “neutral” signal, the bank says, whereas any cash level above 5% is considered a contrarian indicator and a good time to buy shares. Cash below 4% is considered a “sell” signal by Bank of America.

Worries about inflation and central bank mistakes are rapidly diminishing, but geopolitical risk is climbing the agenda due to war in the Middle East.

The survey found that the most-crowded trades in October were long Big Tech, short China stocks 22%, and long US government bonds. It notes that contrarian trades include owning cash, US dollars and commodities.