Rosalind Evans
As the Federal Reserve shifts its policy and lowers interest rates, financial advisors suggest that investors look at their bond portfolios fresh. With the central bank initiating its first rate cut in four years, bonds are expected to gain a boost from the more dovish monetary approach. “This is a fantastic time to revisit bonds,” said Scott Ward, a certified financial planner and senior vice president at Compound Planning in Birmingham, Alabama. Here’s why this could be an opportune moment for bond investors.
Understanding the Fed’s Policy Shift
In September, the Federal Reserve implemented a 50 basis point cut, reducing its benchmark rate from 4.75% to 5%. The move marks the start of an easing cycle after years of rate hikes that had pushed yields on savings accounts and certificates of deposit to new highs. Following a stronger-than-expected jobs report, analysts predict that future rate cuts may be more conservative. However, the overall shift in Fed policy will likely benefit the bond market, as falling interest rates tend to increase bond prices. Ward emphasized that cash holdings may become “less attractive, less productive as rates decline.”
Corporate Bonds: A Stronger Option Amid Lower Rates
Financial experts, such as Ted Jenkin, CEO and founder of oXYGen Financial in Atlanta, recommend considering medium- to longer-term corporate bonds during a falling-rate environment. In the third quarter of 2024, the Morningstar US Corporate Bond Index posted a return of 5.8%, outperforming the broader bond market’s 5.2% return. Jenkin noted that many corporations capitalized on the low interest rates during the pandemic to refinance their debt and strengthen their balance sheets. Ward added, “I think we’ll see corporations emerge from this rate hike cycle in pretty good shape.”
Municipal Bonds: Tax Benefits for Investors
Municipal bonds, or “munis,” are also becoming more appealing to investors, particularly those in high-income tax states. These bonds offer federally tax-free interest, and investors in the issuing state can also avoid state taxes. Given the potential for higher future taxes, munis could be a valuable addition to a bond portfolio. Jenkin noted, “Longer-term municipal bonds should fare better if the Fed continues to cut interest rates.” Ward echoed this sentiment, highlighting that municipalities provide “excellent qualities for long-term investors,” including a favorable risk profile alongside attractive yields.
Adjusting Bond Duration for Maximum Returns
Financial advisors often adjust bond duration, which measures a bond’s sensitivity to interest rate changes, to align with the current market environment. Jenkin explained that his firm started transitioning to “medium-term duration” bonds—spanning five to ten years—months before the Fed’s first rate cut in September. As interest rates continue to fall, bonds with longer durations are expected to provide more rewarding returns for investors.
Why Now Is the Right Time for Bonds
With the Federal Reserve’s shift toward lower interest rates, bonds have re-emerged as a potentially lucrative investment. Financial planners like Scott Ward and Ted Jenkin emphasize that a thoughtful review of bond portfolios could unlock opportunities for investors seeking safer returns. Whether through corporate bonds, municipal bonds, or adjusting bond duration, there are multiple ways to navigate the current market environment. As Ward succinctly said, “This is a fantastic time to revisit bonds.”
