What’s the outlook for the 2023 bond market?

In this article we are going to discuss our outlook on the 2023 bond market and the key dynamics in play.

How does the change in yields to maturity impact the expected returns of bonds in the next 12 months? The yield to maturity is the average annual yield of the bond until it becomes due.?

Longer term bonds are more sensitive to interest rates

The shorter the average life of the bond, the closer the yield to maturity is to the actual annual interest paid on the bond. However, longer duration bonds are more influenced in the short term by the current level of interest rates. And sometimes price fluctuations can be extreme when interest rates are changed.

For example, if we invest $100,000 in a one-year Treasury bond now, at an interest rate of 5.25%, we will earn $5,250 in 12 months’ time, as the bond matures and is redeemed.

If we invest for a period of more than a year, then the return we earn is influenced more by the level of interest rates in the market. Remember as interest the rates rise, bond prices drop, and vice versa.

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