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One of JPMorgan’s highest-conviction forecasts for 2024 is on government bonds. Hugh Gimber, JPMorgan Asset Management’s global market strategist, said that buying 10-year U.S. government bonds while yields are currently around 4% would be “one of our most confident calls for next year,” if inflation continues falling back toward the 2% target without an economic recession. But bond prices would rally sharply, and yields would fall in a recession scenario, as markets price in a more profound rate cutting cycle by the Federal Reserve, he added . “If that recession doesn’t show up, and we do slide back to target, you take your 4%, you move on, you say ‘thank you very much'”, Gimber told CNBC’s Squawk Box Europe on Thursday. “If, actually, the economy slows more sharply next year, then we still see more room for markets to price a deeper cutting cycle than what is currently baked in.” US10Y YTD line Crucially, Gimber highlights that markets currently see the Fed’s rate cutting cycle bottoming well above 3% even in a recession scenario. Interest rate traders are currently pricing in a first cut of 25 basis points in March. According to the CME Fed Watch tool , the market expects to end the year with the Fed Funds Rate between 350 and 400 basis points, down by more than 100 basis points from current levels. However, Gimber said history suggests that once the Fed embarks on rate cuts amid economic weakness, they tend to cut more than what is priced in. “So that, for me, is the bullish argument for bonds,” he added. In other words, Gimber signals current market pricing underestimates how deep the Fed would likely cut in the event of a recession, making the risk-reward ratio attractive for holding longer-duration government bonds. “This is where we feel that, ultimately, now is a good time to be locking in bond yields,” he said. “You may get a bit more volatility. You might be trying to play for an extra 10-20 basis point rise in 10-year yields before you lock that in, but we think it’s important not to try and be too cute here and say the role of government bonds in a multi-asset portfolio is back.” He went on, “You’re being provided steady income, and they offer you that diversification potential against the deeper slowdown.” The JPMorgan Asset Management strategist also highlighted dividend-paying stocks as an attractive area , with payout ratios still low. He argued that dividends tend to perform well coming off Fed rate hike cycles, and that, with uncertain economic growth next year, steady dividend income would help buffer portfolio volatility. Central to JPMorgan’s market outlook is whether inflation can return sustainably to the 2% target. While consumer prices for goods plunged recently, Gimber noted services inflation remains stickier. He says cooling in the labor market is likely needed to bring services inflation down to levels comfortable for central banks. On monetary policy, Gimber notes that markets are premature in anticipating rate cuts in the first quarter of 2024, but admitted that he was “surprised” by the Federal Reserve’s shift to a more dovish monetary policy stance. “I hold my hands up, I was surprised by how quickly the tone has shifted at the Fed,” he said Thursday.
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