Core Bonds vs. Fed Funds Rate
Text on screen: PIMCO
Text on screen: Brian Kyle, SENIOR VICE PRESIDENT, U.S. GWM ADVISOR SOLUTIONS
Kyle: We have reached an important milestone for bonds
Text on screen: TITLE – Why Now: Historically, when core bonds out-yield short term rates they have delivered attractive returns. Line chart measures the yield of the core bonds as measured by the Bloomberg U.S. Aggregate Index from 2000- 2024 against the yields for cash as represented by the FTSE 3 Month Treasury Bill Index, and the Federal Funds rate. It shows that when core bonds retains its yield advantage versus cash for a sustained period, they has gone on to outperform cash by over the next year on average. Those time periods are circled on the chart; they are: 2001, 2007, 2019 and the current time frame.
Today, the yield on core bonds is higher than the federal funds target rate. Why is this important? Well, each of the last times that we've seen that relationship normalize like we just did, bonds have gone on to outperform cash. You'll also notice these returns to normal occur during some pretty notable periods during market history. But why has this happened? Well, there's two sides to this coin.
One, the Fed funds rate has started to decline and as the Fed continues to cut rates, so will the yields on money markets and ultimately the returns out of cash. The other side of the coin is the yield on fixed income today.
And for core bonds, we're looking at yields today as high, if not higher than we've seen, in many years. So for investors sitting in cash, we believe today is a really interesting time to look to bonds. If you'd like to explore this topic in greater detail, please visit our advisor playbook and PIMCO's advisor forum at pimco.com, or as always, reach out to our team or your local account manager. Thank you!!
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Disclosures
Past performance is not a guarantee or a reliable indicator of future results.
All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Investors should consult their investment professional prior to making an investment decision.
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Bloomberg U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specific indices that are calculated and reported on a regular basis. FTSE 3-Month Treasury Bill Index is an unmanaged index representing monthly return equivalents of yield averages of the last 3 month Treasury Bill issues. It is not possible to invest directly in an unmanaged index.
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