With the Federal Reserve expected to begin cutting interest rates in September, income investors may want to make sure their portfolios are in check. On Friday, at the Fed's annual retreat in Jackson Hole, Wyoming, Chairman Jerome Powell said “the time has come to adjust policy.” However, he did not specify the timing or magnitude of the cuts. According to the CME Group's FedWatch tool, the market is pricing in expectations for a first rate cut in September. Most traders expected a 25 basis point cut, but about 40% expected a 50 basis point cut. Treasury yields fell after Powell's speech on Friday, with the U.S. 10-year Treasury yield last falling more than 4 basis points to 3.818%. Bond yields are inversely related to prices. 1 basis point equals 0.01%. BlackRock believes the economy is in good shape but still slowing as the rate-cutting cycle unfolds. “If that's correct, and we think even with some changes, then this will continue to be a very good environment for fixed income investments, particularly those centered around the belly of the yield curve, where yields are Rick Rieder, chief investment officer of global fixed income at Deutsche Bank, said in a statement after Powell's speech: “It is quite generous and will benefit greatly from further declines in interest rates. “Evaluate Your Cash Assets and Bond Portfolio When investors consider portfolio changes and make adjustments to any cash in a money market fund or high-yield savings account, they should first consider their goals,” says CFP, Founder and wealth advisor Lawrence Sprung said. That said, investors who rely on assets for income should be prepared for a drop in spending sooner or later. What you choose to do depends on your risk profile, Spron said. “If my risk profile is consistent with the way I invest, then maybe I just have to accept that interest rates are going to be lower in the future,” he said. Instruments such as money market funds and high-yield savings accounts will contribute to the rate cut. Quick response. While it's important to have liquidity, if you don't need your funds temporarily, consider moving your funds to other assets. In fact, over the past few months, several Wall Street banks have been advising investors to withdraw their cash. Money market funds now held about $6.24 trillion in the week ended Wednesday, according to the Investment Company Institute. Clark Bellin, chief investment officer at Bellwether Wealth in Lincoln, Neb., is currently bullish on investment-grade corporate bonds. He prefers individual bonds to bond funds because investors have more control. Still, for retail investors, exchange-traded funds and mutual funds can be a great way to diversify. “Not so long ago, you had to pay a premium for a bond to get a decent coupon. Now you can buy the same bond at a discount,” he said. “You have both the yield – the interest you can earn – and the potential for capital appreciation.” He also extended the term, which he expects to be about seven to nine years. Duration is a measure of a bond's price sensitivity to interest rate fluctuations, and bonds with longer maturities tend to have longer durations. Still, Beilein didn't buy bonds and forget about them. Instead, he will take a closer look at the economy. “The fact that the Fed is talking about lowering interest rates now doesn't mean that rates will go back to where they were because of the lower inflation data,” he said. “It doesn't mean that inflation will stay low. It could pick up again. . ” Looking for Selective Opportunities Bellin also likes to buy municipal bonds for his high-net-worth clients. In that area, he stuck with general obligation bonds. These so-called GO bonds are backed by the full faith and credit of the issuing government and its tax authorities. “It’s safe to know that the known tax base is supporting the bond’s payments,” he said. Meanwhile, Michael Plage, a portfolio manager on Fidelity’s Core/Core+ Bond team, likes the belly of the curve. Treasury bonds: 5-year, 7-year or even 10-year bonds. “When the Fed is in an easing cycle, Treasuries tend to do well, while risk asset classes — corporate bonds and credit asset classes — tend to lag the Treasury market a little bit,” he said. In fact, the allocation to U.S. Treasuries in the funds he manages today is at an all-time high relative to his performance over the fund's lifetime. “We're just being patient. Patience is one of the best ideas we have right now,” Platsch said. “Excess returns are episodic. Currently, we have not experienced anything like this.” He also sees special opportunities in investment grade credit, such as bonds with the potential for upgrades. “There's a reason corporate bond spreads are narrowing. The fundamentals are good, but at some point they're going to get worse,” he said. Meanwhile, BlackRock’s Reid sees selective opportunities in high-yield bonds. Fundamentals have improved, but the level of dispersion is high, he said. There are also technical drivers, he added, noting “strong demand for yields.”
As Fed gears up for rate cuts, here’s what income investors need to do
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