Fixed income investors may want to consider making some tweaks to their portfolio as the second half of the year begins. Despite earlier predictions of multiple rate cuts this year, the Federal Reserve kept the federal funds rate steady in the range of 5.25% to 5.50%. However, the central bank is expected to start cutting interest rates in the coming months, possibly as early as September. At its last meeting in June, the Fed signaled just one rate cut before the end of the year. But many on Wall Street still think two cuts are possible this year, including Charles Schwab. “There is room for them to cut interest rates because inflation is falling… [and] the labor market is cooling,” said Kathy Jones, chief fixed-income strategist at Charles Schwab. Both price data and the labor market are moving close to the Fed’s targets, and real interest rates, after inflation, remain high, Jones added. expects better returns for fixed income in the second half, but believes volatility will remain high, so finding the right mix of fixed income categories will be key to performance, Jones said she would begin to consider adding some duration — with in other words, to move to longer maturities. This means that when short-term interest rates are above those paid on longer-dated securities, he explained, there are actually many opportunities to collect 5% returns over the medium to long term without taking on significantly more credit. She specifically likes investment-grade corporate and government bonds, mortgage-backed securities with a six- to seven-year maturity, for attractive yields and potential price appreciation. “We know that spreads are tight [in investment grade bonds], but we don’t see a big default cycle starting any time soon … where we’re worried about a capital loss or a big downgrade,” Jones said. Investors can have a weighted portfolio with Treasurys at one end and investment-grade bonds and corporate MBS, on the other hand, he suggested they may also choose a bond ladder, covering the middle rungs of the ladder with corporate and agency MBS, the bank itself said it expects the yield curve to remain inverted until the end of 2024, but said the curve would could be positive-sloping by the end of 2025. The benchmark 10-year Treasury is currently yielding 4.259% while 1-year Treasuries and lower yields indicate that as a The combination of looser monetary policy and/or slowing growth and inflation allows the curve to steepen, gradually extending duration serves investors better, JPMorgan said in its interim outlook may be better suited to adopting a barbell approach, still generating attractive yields on the front end while holding some duration as a portfolio hedge.” , the team wrote. Meanwhile, Wells Fargo argues that investors are prioritizing credit quality as the yield curve remains inverted over the next 6 to 18 months. “If this whole story somehow ends up with more financial pain before the Fed comes to the rescue, you want to be quality in your portfolio,” explained Sameer Samana, senior global market strategist at Wells Fargo Investment Institute. Right now, Wells Fargo favors municipal bonds and securitized products, such as residential mortgage-backed securities. It finds high-quality residential MBS, including agency and non-agency mortgages, attractive because of their relative value compared to investment-grade companies. Meanwhile, muni bonds are a good investment for those in the highest tax bracket because they are free from federal taxes, Samana said. “Given all the talk about deficits and fiscal responsibility, you could potentially see a scenario where at some point tax rates have to go up for more fiscal discipline,” he said, adding that it won’t happen anytime soon. In munis, Wells Fargo likes state and local general obligations and basic service income.
