With the Federal Reserve expected to start cutting interest rates in September, income investors may want to make sure their portfolios are properly managed. At the Fed’s annual meeting in Jackson Hole, Wyoming on Friday, Chairman Jerome Powell said, “It’s time to adjust policy.” However, he did not specify the exact timing or size of the cut. According to the CME FedWatch Tool, the market is pricing in the first rate cut in September. The majority of traders expect a 25 basis point cut, while about 40% expect a 50 basis point cut. Treasury yields fell after Powell’s speech on Friday, with the 10-year Treasury yield dropping more than 4 basis points to 3.818%. Bond yields move inversely to prices. One basis point is equal to 0.01%. BlackRock sees the economy in a good but still slowing state as the rate cut cycle progresses. “If that’s correct, and we believe that even with some volatility around that, this continues to be a very good environment for higher-yielding fixed-income investments, particularly those centered in the underbelly of the yield curve where yields are very high and would benefit greatly from further declines in interest rates,” Rick Rieder, BlackRock’s chief investment officer for global fixed income, said in a statement after Powell’s speech.Assessing cash assets and fixed-income portfoliosAs investors consider making changes to their portfolios and adjusting cash in money market funds or high-yield savings accounts, they should first consider their goals, said Laurence Sprunk, a certified financial planner and wealth advisor and founder of Mitlin Financial in Hauppauge, N.Y. “If it’s capital growth, then it’s about making sure that you’re getting the best possible return.” [bond investors] “It’s very likely we’ll see capital growth in the coming months,” he said. That said, investors who rely on assets as a source of income should be prepared for dividends to fall sooner or later. What you choose depends on your risk profile, Sprunk said. “If your risk profile is in line with how you invest, you may just have to accept the fact that interest rates are going to be lower going forward,” he said. Financial products such as money market funds and high-yield savings accounts react pretty quickly to interest rate cuts. It’s important to have liquidity, but if you don’t need it right away, consider moving it into another asset. In fact, in the past few months, several Wall Street banks have been advising investors to move away from cash. As of the week ending Wednesday, there was about $6.24 trillion currently sitting in money market funds, according to the Investment Company Association. Clark Belin, chief investment officer at Bellwether Wealth in Lincoln, Nebraska, is bullish on investment-grade corporate bonds right now. He prefers individual bonds over bond funds because they give investors more control. Still, for individual investors, exchange-traded funds and mutual funds can be a good way to diversify. “Not 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 earn, and the potential for capital appreciation.” He’s also stretching his duration from seven to about nine years. Duration is a measure of how sensitive a bond’s price is to changes in interest rates, and bonds with longer maturities tend to have longer durations. Still, Belin isn’t planning on buying and forgetting about bonds. Rather, he’s going to keep a close eye on what happens with the economy. “Just because the Fed is now saying they’re cutting rates doesn’t mean that interest rates are going to go back to where they were before because inflation has come down,” he said. “It doesn’t mean inflation is going to stay low. It could come back on its head.” Seeking selective opportunities Belin also likes municipal bonds for his wealthy clients. Within that sector, he sticks to general obligation bonds. These so-called GO bonds are backed by the full faith and credit of the issuing government and its taxing authorities. “You’re safe because you know that a known tax base is backing the bond payments,” he said. Meanwhile, Michael Plage, a portfolio manager on Fidelity’s core/core-plus fixed income team, likes Treasuries at the bottom of the curve at five, seven and even 10 years. “When the Fed is in an easing cycle, Treasuries tend to do well and risk asset classes (corporate and credit asset classes) tend to lag the Treasury market a little bit,” he said. In fact, the fund he currently manages has a historically high allocation to Treasuries compared to the fund’s overall life. “We’re just being patient. Patience is one of our best bets right now,” Plage said. “Excess returns are transitory. We’re not in that period right now.” He also sees unique opportunities in investment-grade bonds, such as when bonds can be upgraded. “Corporate spreads are tight for a reason. The fundamentals are good, but they’re going to get worse,” he said. BlackRock’s Lieder, meanwhile, sees select opportunities in high-yield bonds. Fundamentals are improving but are quite mixed, he said. And with technical tailwinds, “demand for yield is solid,” he added.
As the Fed prepares to cut rates, what income investors should do
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