A strong macro and fundamental backdrop and continued moderating inflation could create a constructive environment for fixed income for the remainder of 2024 and into next year. And while elections can matter, our primary focus remains on the Federal Reserve and the path of interest rates. Matt Brill, Head of North American Investment Grade, explains.
Since September, the Federal Reserve has cut the Fed funds rate by 75 basis points. Typically, rate cuts lead to rising bond prices, but we've seen bond prices fall due to increased longer-dated rates like the 10-year Treasury yield. Let's break down what's going on.
While the Fed controls short-term rates, longer-dated rates are market-driven, influenced by growth and inflation expectations. Recent economic data, including a resilient labor market and above-trend GDP growth, have contributed to rising yields.
The outcome of elections also played a role. Financial markets often prefer gridlock in Washington, which slows significant changes. However, even with one party controlling the executive and legislative branches, the US economy has remained stable. However, elections can matter, and we'll be paying attention to policy developments in areas like tariffs, immigration, taxes, and deregulation.
That said, our primary focus remains on the Federal Reserve and the path of interest rates. While we anticipate that rates will continue to trend lower, it may happen at a slower pace.
Nonetheless, the macro and fundamental backdrop for bonds is strong, and inflation continues to moderate. This could create a constructive environment for fixed income investments for the remainder of 2024 and into next year. Although rates volatility has disrupted short-term performance, it has potentially provided a more attractive entry point. Volatility often means opportunity for active managers, and we believe that this environment may present such opportunities.
Important information
Most references are US-centric and may not apply to Canada.
All data is USD, unless otherwise stated.
Past performance is not a guarantee of future results.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. The opinions expressed are those of the authors as of November 4, 2024 and are based on current market conditions and subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions. The
Federal funds rate is the rate at which banks lend balances to each other overnight.
A basis point is one-hundredth of a percentage point.
Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
This material may contain statements that are not purely historical in nature but are “forward-looking statements.” These include, among other things, projections, forecasts, estimates of income, yield or return or future performance targets. These forward-looking statements are based upon certain assumptions, some of which are described herein. Actual events are difficult to predict and may substantially differ from those assumed. All forward-looking statements included herein are based on information available on the date hereof and Invesco assumes no duty to update any forward-looking statement. Accordingly, there can be no assurance that estimated returns or projections can be realized, that forward-looking statements will materialize or that actual returns or results will not be materially lower than those presented. All information is sourced from Invesco, unless otherwise stated.
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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, Matt Brill, Head of North American Investment Grade, outlines three reasons why now may be an ideal time for investors to reassess their portfolios.
00:00:02:32 - 00:00:22:06
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
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
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
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
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
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
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
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.
Bond videos are brought to you by Invesco’s US Fixed Income team which manages a range of strategies across the fixed income landscape. Learn more about our fixed income offerings.
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Important information
NA4052644
Most references are US-centric and may not apply to Canada.
All data is USD, unless otherwise stated.
Past performance is not a guarantee of future results.
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. The opinions expressed are those of the authors as of November 4, 2024 and are based on current market conditions and subject to change without notice. These opinions may differ from those of other Invesco investment professionals.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
The Federal funds rate is the rate at which banks lend balances to each other overnight.
A basis point is one-hundredth of a percentage point.
Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
This material may contain statements that are not purely historical in nature but are “forward-looking statements.” These include, among other things, projections, forecasts, estimates of income, yield or return or future performance targets. These forward-looking statements are based upon certain assumptions, some of which are described herein. Actual events are difficult to predict and may substantially differ from those assumed. All forward-looking statements included herein are based on information available on the date hereof and Invesco assumes no duty to update any forward-looking statement. Accordingly, there can be no assurance that estimated returns or projections can be realized, that forward-looking statements will materialize or that actual returns or results will not be materially lower than those presented. All information is sourced from Invesco, unless otherwise stated.
Not a Deposit | Not FDIC Insured | Not Guaranteed by the Bank | May Lose Value | Not Insured by any Federal Government Agency Invesco Distributors Inc.
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