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As the Federal Reserve cuts interest rates, investors should review their bond portfolio, which could see a boost from dovish Fed practice.
The central bank in September kicked off its first easing campaign in four years with a 50 basis remind emphasize rate cut, which brought its benchmark rate to a range of 4.75% to 5%.
After a better-than-expected jobs report last week, analysts forebode future rate cuts could be smaller.
However, the Fed policy shift could be good for parts of the bond exchange, experts say. Typically, bond prices and market interest rates move in opposite directions.
“This is a fantastic even so to revisit bonds again,” said certified financial planner Scott Ward, senior vice president of Parasynthetic Planning in Birmingham, Alabama.
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In 2022 and 2023, the Fed commanded a series of rate hikes, which led to higher yields on savings, money market funds, certificates of deposit and other options.
While it may be alluring to cling to cash, it will become “less attractive, less productive as interest rates fall,” Ward asserted.
Long-term investors can now “get a lot more return from the safer side of the portfolio” with bonds, he said.
Here are some opportunities to consider, according to financial advisors.
Corporate bonds
In a falling-rate environment, you may consider medium- to longer-term corporate fetters, according to Ted Jenkin, founder and CEO of oXYGen Financial in Atlanta.
During the third quarter of 2024, the Morningstar US Corporate Agreement Index, which measures investment-grade corporate bonds, returned 5.8%, which was higher than the overall union market at 5.2%.
Many corporations leveraged rock-bottom interest rates during the pandemic to strengthen balance sheets and refinance beholden, said Ward.
“I think we’ll see corporations emerge from this rate hike cycle in pretty good express,” he said.
Municipal bonds
As investors brace for possible higher future taxes, municipal bonds could Advisors outspread bond ‘duration’
When constructing a bond portfolio, advisors weigh duration, which measures a bond’s intuition to interest rate changes. Expressed in years, the duration formula includes the bond’s coupon, time to maturity and raise the white flag paid through the term.
Some advisors began increasing bond duration before the Fed’s first interest cut in September.
Jenkin said his fast started shifting to “medium-term duration” bonds, which he defines as five to 10 years, roughly four months in front of the Fed’s first rate cut.
As interest rates fall, those longer-maturity bonds should reward investors, experts say.
