In CNBC’s article “Where to find high and safe yield when the Fed starts to trim rates,” Darla Mercado quotes Paul Olmsted, senior manager research analyst, fixed income, at Morningstar saying “It favors longer-term strategies: You can have some duration and still get pretty strong yield, so the income component is pretty attractive relative to where it’s been for the past two decades,” With the Federal Reserve possibly planning to lower interest rates in September, the era of enjoying 5% yields on cash investments like money market funds and high-yield savings accounts might be ending. Chairman Jerome Powell has hinted that a rate cut could happen if inflation continues to drop, which would likely reduce yields on these short-term investments. Investors currently benefiting from these high short-term returns might need to rethink their strategies as their income could decline.
In anticipation of this change, investing in longer-term bonds could be a smart move. Generally, bonds offer better yields when interest rates are higher, and as rates go down, bond prices often go up, which could lead to gains. Paul highlights the advantages of longer-term strategies, noting that bonds with longer durations can offer good yields. Core bond funds, which mix Treasurys, mortgage-backed securities, and corporate bonds, might provide both stability and yield in a fluctuating market. Funds like Vanguard’s Core Bond Fund and Fidelity’s Intermediate Bond Fund offer reasonable durations while delivering solid fixed-income exposure.
For those in higher tax brackets, municipal bonds can be an attractive option because they are tax-exempt. Although municipal bonds usually yield less than corporate bonds, their tax benefits can be especially valuable for high-income investors. Sean Carney from BlackRock suggests using a barbell strategy with municipal bond ETFs to balance duration and yield while taking advantage of the tax benefits. This approach can help manage current market changes and maximize returns in a potentially lower-rate environment.
Comments