With Federal Reserve rate cuts expected to begin in September, income investors may want to make sure their portfolio is in check. On Friday at the Fed’s annual retreat in Jackson Hole, Wyoming, Chair Jerome Powell said, “The time has come for policy to adjust.” However, he didn’t specify the exact timing and the magnitude of the cuts. The market is pricing in the first cut to come in September, according to the CME FedWatch Tool . The majority of traders anticipate a 25 basis point cut, but about 40% expect a 50 basis point cut. After Powell’s speech Friday, Treasury yields slipped, with the U.S. 10-year Treasury yield last down more than 4 basis points at 3.818%. Bond yields move inversely to prices. One basis point equals 0.01%. BlackRock sees a good, but still moderating economy as the rate-cutting cycle unfolds. “If that is right, and we think even if there is some variation around that, then this is going to continue to be a very good environment for yielding fixed income investments, and particularly those centered around the belly of the yield curve where yield is quite generous and would benefit significantly from a further drop in interest rates,” Rick Rieder, BlackRock chief investment officer of global fixed income, said in a statement after Powell’s speech. Assess your cash assets and bond portfolio As investors contemplate portfolio changes, as well as adjustments to any cash in money market funds or high-yield savings accounts, they should first consider their goals, said certified financial planner Lawrence Sprung, founder and wealth advisor at Mitlin Financial in Hauppauge, N.Y. “If it is capital appreciation, [bond investors] are probably positioned extremely well in the coming months to see that capital appreciation,” he said. That said, investors depending on the assets for income should be prepared for a drop in their payouts sooner or later. What you choose to do depends on your risk profile, Sprung said. “If my risk profile is aligned with the way I’m invested, then maybe I just have to resign myself to the fact I will be at a lower rate going forward,” he said. Instruments like money market funds and high-yield savings accounts will react pretty quickly to rate cuts. While having liquidity is important, consider moving money into another asset if you don’t need it right away. In fact, over the last few months, several Wall Street banks have been advising investors to shift out of cash . Some $6.24 trillion is currently sitting in money market funds, as of the week ended Wednesday, according to the Investment Company Institute . Clark Bellin, chief investment officer at Bellwether Wealth in Lincoln, Nebraska, is bullish in investment-grade corporate bonds right now. He prefers individual bonds over bond funds because the investor has more control. Still, for retail investors, exchange-traded and mutual funds can be a good way to gain diversification. “A while ago you had to pay a premium for a bond to get a decent coupon. Now you can get that same bond at a discount,” he said. “You have both yield — the interest you can earn — and potential for capital appreciation.” He is also extending duration, looking at about 7 to 9 years. Duration is a measurement of a bond’s price sensitivity to fluctuations in interest rates, and issues with longer maturities tend to have greater duration. Still, Bellin is not buying a bond and forgetting about it. Instead, he’ll be watching carefully to see what happens in the economy. “Just because the Fed is talking about lower rates now, doesn’t mean the rates are going to go back to where they were just because inflation numbers go down,” he said. “It doesn’t mean inflation is going to stay low. It could raise its head again.” Seeking selective opportunities Bellin also likes municipal bonds for his high-net-worth clients. In that sector, he sticks with general obligation bonds. These so-called GO bonds are backed by the full faith and credit of the issuing government, as well as its taxing authority. “There is safety knowing that a known tax base is supporting a payment of a bond,” he said. Meanwhile, Fidelity’s Michael Plage, a portfolio manager on the core/core plus bond team, likes Treasurys in the belly of the curve: 5, 7 and even 10 years. “When the Fed is in an easing cycle, Treasurys tend to do well and risk asset classes — corporate bonds and credit asset classes — tend to lag the Treasury market a little bit,” he said. In fact, he has an historically high allocation to Treasurys in the funds he manages today relative to where he has been in the life of the funds. “We are just being patient. Patience is one of our best ideas right now,” Plage said. “Excess returns are episodic. Right now, we are not in one of those episodes.” He also sees idiosyncratic opportunities within investment grade credit, like when a bond has a potential for an upgrade. “Corporate bond spreads are tight for a reason. Fundamentals are good, but at some point they will deteriorate,” he said. Meanwhile, BlackRock’s Rieder sees selective opportunities in high-yield bonds. Fundamentals have improved, but with a great deal of dispersion, he said. There are also technical tailwinds, he added, noting that “demand for yield is robust.”
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