The Fed looks ready to start cutting interest rates. In our view, this possible move isn't because it has to but rather because it can. That's an important distinction. As we enter this likely rate-cutting cycle, now is a great time for investors to reassess their portfolios.
Hear from Matt Brill – Head of North American Investment Grade
00:00:00:00 - 00:00:02:32
00:00:02:32 - 00:00:22:06
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We're finally at a point where the fed looks ready to start cutting interest rates, and a lot of investors are asking us, what should we be doing in this environment? To answer that, we first need to consider why the fed is cutting. In our view, it's not because they have to. It's because they can. That's an important distinction.
00:00:22:11 - 00:00:43:01
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Inflation is slowing. The labor market is cooling, and the economy seems to be finding its balance. But we don't see this tipping into a hard or prolonged recession. We expect the fed will likely cut rates gradually over the next year to 18 months. This should bring rates back to a less restrictive, more neutral stance that we believe will support both the economy and the bond market.
00:00:43:06 - 00:01:05:30
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As we enter this likely rate cutting cycle, now is a great time for investors to reassess their portfolios. Here are three things to consider. Number one, money markets T-bills and CDs have been great investments over the past few years and investors were wise to hold them. But as the fed starts cutting rates, it may be time to move on from renting those yields to locking them in for the longer term.
00:01:05:35 - 00:01:27:32
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By adding a bit of high quality credit, investors can secure more attractive yields. Even with an inverted yield curve. This approach offers the potential for better returns compared to staying in short term cash vehicles. And history is on your side with this approach. Bonds have historically outperformed cash and provided returns in excess of inflation, while cash has often struggle to keep pace.
00:01:27:37 - 00:01:50:26
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Second, bonds are back to acting like bonds. For a while, income was missing from fixed income because rates were so low, leading some to question the viability of the traditional 60/40 portfolio. But today's starting yields are more attractive, providing higher income levels and lowering the correlation between bonds and equities. More of your bond returns now come from income, not just capital appreciation.
00:01:50:30 - 00:02:13:23
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Third and last. You don't have to take on a lot of risk to see positive outcomes in the bond market. Investment grade credit, higher quality high yield bonds and top segments of the securitized market represent a sweet spot. If the economy has a soft landing, investors could benefit from an attractive income stream, potential capital appreciation from duration and lower volatility as the fed cuts.
00:02:13:28 - 00:02:34:48
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And if we do see a hard recession, the Fed's ability to cut rates faster should benefit high quality bonds compared to equities and riskier fixed income segments. Institutional investors have already been moving aggressively into intermediate investment grade bonds over the past year. And it's not too late to get in. With the fed just beginning to cut rates on their journey here.
00:02:34:57 - 00:02:46:35
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There's a wall of cash and in motion, as both retail and institutional investors continue moving into the investment grade bond space, which we believe will keep supporting the market.
00:03:27:00 - 00:03:49:00
Bond videos are brought to you by Invesco’s Fixed Income team in the US. The team manages a range of strategies across the fixed income landscape.
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