Lucy Lambrix | Stone | Getty Images
As the Federal Reserve cuts interest rates, investors should review their bond portfolios as dovish policies could provide a boost.
In September, the central bank launched its first easing policy in four years, cutting interest rates by 50 basis points and lowering the benchmark interest rate to a range of 4.75% to 5%.
After last week’s better-than-expected jobs report, analysts predicted that future rate cuts may be smaller.
However, experts say the Fed’s policy shift could be beneficial to parts of the bond market. Typically, bond prices and market interest rates move in opposite directions.
“Now is a great time to take another look at bonds,” said Scott Ward, a certified financial planner and senior vice president at Complex Planning in Birmingham, Ala.
More from Personal Finance:
How tax bracket increases affect your brokerage account
SEC says crypto relationship scams cause ‘catastrophic harm’
Many Americans would rather talk about politics than money
In 2022 and 2023, the Federal Reserve implements a series of interest rate hikes, causing yields on savings, money market funds, certificates of deposits and other options to rise.
Ward said that while holding cash may be tempting, as interest rates fall, cash will become “less attractive and less productive.”
Long-term investors can now “get more returns from the safer side of their portfolios” through bonds, he said.
Here are some options worth considering, financial advisors say.
corporate bonds
In a falling interest rate environment, you can consider the medium to long term Corporate bonds, said Ted Jenkin, CEO and founder of oXYGen Financial in Atlanta.
Q3 2024, Morningstar U.S. Corporate Bond IndexThe return on investment-grade corporate bonds is 5.8%, higher than higher than the overall bond market is 5.2%.
Ward said many businesses have taken advantage of extremely low interest rates during the pandemic to strengthen balance sheets and refinance debt.
“I think we’re going to see companies come out of this rate hike cycle in good shape,” he said.
municipal bonds
Investors prepare for possible scenarios As taxes rise in the future, municipal bonds may become more attractive, especially for residents of high-income tax states.
Municipal bond interest is federally tax-free, and you avoid state taxes when you live in the issuing state. Municipal bonds generally have lower default risk than corporate bonds.
“If the Fed continues to cut rates, long-term municipal bonds should perform better,” said Jenkin, who is also a member of CNBC’s financial advisory board.
“Cities offer some excellent qualities for long-term investors,” Ward said, including attractive yield potential and a lower risk profile.
Advisor extends bond ‘maturity’
When constructing a bond portfolio, advisors weigh duration, which measures a bond’s sensitivity to changes in interest rates. The duration formula is measured in years and includes the bond’s coupon, time to maturity, and the yield paid over the entire term.
Some advisers began increasing bond duration ahead of the Fed’s first rate cut in September.
Jenkin said his firm began moving toward “medium-term maturity” bonds, which he defined as five to 10 years, about four months before the Fed’s first rate cut.
Experts say these longer-dated bonds should provide returns for investors as interest rates fall.
About The Author
