Investing in Bonds as the Fed Cuts Rates

Eric Golden, founder and chief executive of the fixed income platform Canopy Capital Group, says financial advisors can add value by bringing tax management to the fixed income side of client portfolios.

Jeff Benjamin: Why is tax-efficient investing more difficult when it comes to bonds? 

Eric Golden: Direct indexing in equities has been a huge success for tax-efficient investors. Many have asked why we haven’t seen the same level of innovation in the bond space until now, and one of the reasons is the sheer size. Equity direct indexing will consider a universe of one or two thousand securities, whereas in the bond market you are talking about one-and-a-half million unique CUSIPs.

JB: Why do you believe tax-individualized investing the future for bond portfolios?

EG: Tax-individualized investing creates the optimal portfolio for each client, based on their unique tax profile and strategy, with the goal of maximizing after-tax returns. Clients continue to demand personalization and tax-optimized investing. We believe the future lies in building unique portfolios based on each individual's tax situation, an investment process that was once restricted to billionaires, which can now be managed for high-net-worth clients. 

JB: What role do ETFs and SMAs play in maximizing after-tax income? 

EG: ETFs can be useful in providing access to slices of the bond market where advisors might not have deep expertise or value hyper-diversification like high-yield or emerging markets. SMAs can be useful in building a more tailored portfolio for tax-sensitive investors.

Tax-Exempt Bonds Are Especially Attractive 

JB: What are the implications for bond portfolios following the recent Fed decision?

EG: The Fed has been driven by data dependence and the desire to communicate future actions. While the election clearly has implications for the economy, it will take time for the Fed to factor in the ramifications. What we are seeing now is a shift from aggressive cuts, to a cut-and-pause approach. 

Further, as front-end rates come down, the biggest impact for investors will be on money market funds, currently sitting with $6.5 trillion in cash. As rates drop, investors will look to extend duration to short and intermediate-term bond portfolios to maintain attractive yields. 

JB: Where are you finding attractive opportunities in fixed income going forward?

EG: Broadly speaking, short- and intermediate-term bonds both look attractive. Tax-exempt bonds are especially attractive for tax-sensitive investors. While we have continued to see an increase in supply in Treasuries and corporate bonds, municipal bonds are supply-limited based on the rules of what can be financed. For intermediate duration, you can construct portfolios with tax-equivalent yields of 5.5% to 6%.

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