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as the fed. lower interest ratesinvestors should review their bond portfoliowhich may be boosted by the dovish policies of the Federal Reserve.
In September, the central bank launched its first easing policy in four years Cut interest rates by 50 basis pointswhich brings its base rate to a range of 4.75% to 5%.
Passed by a Employment report better than expected Last week, analysts predicted future rate cuts can 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.
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In 2022 and 2023, the Federal Reserve implemented a series of interest rate hikes, causing savings yields to rise. money market funds, certificate of deposit and other options.
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 bondsaccording to Ted Jenkinfounder and CEO 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 Higher taxes in the futureMunicipal bonds can become more attractiveespecially 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,” Jenkin said. financial advisory committee.
“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” 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.
