The world of fixed-income investments has been quite a ride in the past few years. Since June 2022, the Federal Reserve (Fed) has introduced a record number of rate hikes in a record amount of time as part of efforts to combat the inflationary environment following the COVID-19 pandemic.
If you have been keeping an eye on the bond market, you have probably noticed some significant movements influenced by the Fed’s policies and broader economic trends. We started 2024 with Fed members forecasting six rate cuts, but we are already halfway through the year, and we have seen zero rate cuts. It is now estimated there will be one or two rate cuts before the end of this year, with a gradual decline throughout 2025 and a leveling out in 2026. It is possible that we will see the first rate cut in December, after the presidential election.
The Fed has been a major player this year. Despite talk of potential rate cuts, the reality of persistent inflation and a surprisingly robust economy has kept the Fed’s policies more restrictive than many anticipated. This cautious stance has resulted in relatively stable returns for bonds so far.
Our economy has shown impressive resilience, managing to avoid severe downturns and trending instead toward a “soft landing”; This means financial conditions have eased somewhat, and corporate bond issuance has surged as credit spreads tightened. Segments like high-yield bonds and leveraged loans have benefited from these conditions – they have been particularly attractive, offering higher yields amid a supportive financial environment. However, as credit spreads narrow, sustaining this momentum for the rest of the year remains a challenge.
Why Include Fixed Income in Your Portfolio
Diversification: First and foremost, fixed-income investments can add much-needed diversification to your portfolio. They usually come with lower volatility compared to stocks, which can help balance out the overall risk.
Steady income: If you are looking for regular income, fixedincome investments can be a reliable source. They offer regular interest payments, making them a great choice for retirees or anyone seeking steady cash flows, especially when savings account interest rates are low.
Capital preservation: For those who prioritize preserving capital, high-quality bonds (such as government or investmentgrade corporate bonds) can offer a safer haven compared to the more volatile stock market.
Economic hedge: Fixed-income investments can serve as a hedge against economic uncertainty and market volatility. In times of economic stress, bonds – especially government bonds – tend to perform well as investors flock to safer assets.
Predictable returns: One of the biggest advantages of bonds is their predictability. With fixed coupon payments, you know what to expect, which can be crucial for financial planning.
In conclusion, 2024 has been a fascinating year for fixed-income investments, with current yields far above their 10-year average.
This asset class offers stability, income, and diversification. Our team has continued to carefully manage portfolio allocations to
fixed income, giving proper consideration to quality and duration. Intermediate-term bonds offer higher coupon payments for a
longer period of time and enhance overall portfolio performance and stability.
– CHAD A. WARRICK
Co-President & CEO
