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  • Writer's pictureRealFacts Editorial Team

Adapting for Rate Cuts: Strategic Moves for Fixed-Income Investors

Updated: Jun 26

Kathy Jones, chief fixed-income strategist at Charles Schwab

Kathy Jones, chief fixed-income strategist at Charles Schwab, noted this week that there’s potential for interest rate cuts due to declining inflation and a cooling labor market. As we enter the latter part of the year, fixed-income investors should reconsider their portfolio strategies in light of recent economic developments. Despite earlier expectations of significant rate cuts, the Federal Reserve has maintained the federal funds rate between 5.25% and 5.50%. However, signs point towards possible rate reductions as early as September. While the Fed initially indicated a single rate cut by year-end, some experts, including those at Charles Schwab, foresee the potential for two cuts. Jones suggests that easing inflation and a slowing job market support the case for rate cuts, which could boost returns for fixed-income investments, although she warns of possible market volatility.

Given the anticipated rate cuts, investors may benefit from extending the maturity of their investments by including longer-dated securities. Jones recommends diversifying beyond traditional Treasury bonds, which face limited price gains under the current inverted yield curve. Instead, she highlights the appeal of intermediate to long-term investment-grade corporate bonds and government-backed mortgage securities, which offer yields around 5% without significantly raising credit risk. With tight spreads and low default risks in investment-grade bonds, investors might consider a barbell strategy combining Treasurys with higher-yielding corporate bonds and mortgage-backed securities to achieve a balanced risk-return profile. JPMorgan supports this approach, advocating for a barbell strategy that capitalizes on high short-term yields while gradually extending portfolio duration as a hedge.

Wells Fargo underscores the importance of focusing on credit quality during the ongoing inverted yield curve period, expected to last 6 to 18 months. Sameer Samana, senior global market strategist at Wells Fargo, advises prioritizing high-quality assets like municipal bonds and securitized products such as residential mortgage-backed securities (MBS), which offer better value compared to investment-grade corporate bonds. Municipal bonds are particularly attractive for high-income investors due to their federal tax exemption, while high-quality residential MBS provide stability amid potential economic downturns. Samana also suggests considering municipal bonds as a prudent choice ahead of potential tax rate increases.


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