Bond Experts Advise Moving Out of Cash, Into Fixed Income
As the Fed considers cutting rates, bonds look rich with opportunities.
With the first Fed interest rate cut in more than four years expected next month, fixed income experts are loaded with high hopes for a cycle that will put bond allocations front and center.
“There’s interest in fixed income again that probably started happening two years ago and that is even stronger today,” said Rebecca Venter, senior fixed income product manager at the Vanguard Group.
Speaking as part of an etf.com webinar this week on how financial advisors can navigate clients through the current state of the bond markets, Venter said the outlook is for bonds to step back into their traditional role of portfolio ballast.
“Investors are not only getting yield but you’re getting a return that is attractive relative to equity returns 10 years out, and getting the return at much lower volatility,” she added. “It’s a great time to be reallocating to fixed income if you’ve been heavier in cash.”
Venter was joined on the panel by Cyrus Amini, chief investment officer at Helium Advisors, and Thomas Urano, managing partner at Sage Advisory.
Moving Out of Cash and Into Fixed Income
The fact that the yield curve remains inverted for the longest period in history is not considered a reason to prevent investors from moving out of high-yielding cash to assume added duration in their bond portfolios.
“In terms of what I’ve been discussing with clients for almost a year, there have been significant opportunities in the fixed income markets,” said Amini. “The fact that we’re wondering if 5%, 6% or 7% yields on fixed income is a time to get in, is a good thing, and the question answers itself.”
The Fed and Fixed Income Strategy
Amini is directing clients to migrate out of cash by staying relatively short on the duration end while moving up in credit quality.
“You’re able to get yields 100-to-200 basis points above the risk-free rate,” he said. “That’s not quite free money, but in terms of fixed income money over the past 10 years, the environment is ripe with opportunities.”
With the Federal Reserve having pushed interest rates to almost 5.5% after a string of 11 rate hikes between March 2022 and July 2023, Urano said, “people hiding out in cash have won the battle.”
“The discussion we’re having is when is the Fed going to cut rates, and that means it’s time to take the money out of cash and invest into longer maturity bonds,” he said. “It’s been well over a decade since you’ve had this opportunity to put yield into your portfolio.”
As Urano sees it, historically, the Fed’s transition into a rate-cutting cycle is good for bonds because “yield is your number one indicator of expected return.”
“There’s still plenty of runway to allocate into a core strategy in the fixed income markets,” he added. “But you don’t do it blindly because we’re going into a cycle with possible recession risks, rising default risks, and delinquency issues in the consumer credit markets.”
On the general theme of extending duration in bond portfolios, Venter said it should factor in each investor’s time horizon and threshold for volatility.
“For the average investor allocating to fixed income and looking for ballast, there’s risk associated with locking in longer term bonds,” she said. “A good starting point is broad market exposure of around a six-year duration.”
