The 'Biggest Mistake' Bond Investors May Make Before Fed Rate Cuts

Despite the Federal Reserve's plans to cut interest rates this year, investors might find it prudent to stick with fixed-income investments, and potentially even increase their exposure to them.

‍

Joanna Gallegos, the co-founder and COO of BondBloxx, emphasized the importance of thoroughly considering opportunities in fixed income before hastily returning to equities. She highlighted this perspective in an interview on CNBC's "ETF Edge" this week.

‍

While the benchmark 10-year U.S. Treasury note yield has retreated from its late 2023 peak of over 5%, it has experienced a resurgence over the past month. At Thursday's market close, the yield was hovering around 4.31%, reaching a high of 4.429% on Wednesday, the highest level so far this year.

‍

To navigate interest rate volatility effectively, Gallegos recommends that investors explore exchange-traded funds (ETFs) focused on intermediate-term bonds.

‍

"If you go into the intermediate space, whether it’s in credit or within Treasurys, you’re taking on some risk and you’re going to benefit from a total return tailwind when rates go down," she explained.

‍

Tony Rochte, from Morgan Stanley Investment Management, echoed a similar sentiment, advocating for a medium-term strategy with instruments like the Eaton Vance Total Return Bond ETF (EVTR), managed by his firm.

‍

"At the moment, it has a 6-year duration and offers a yield of about 6.6%," Rochte noted during the same interview. "It represents a portfolio of best ideas."

‍

Rochte also highlighted municipal bond funds, such as the Eaton Vance Short Duration Municipal Income ETF (EVSM), as attractive options for generating income.

‍

"We recently converted a municipal bond mutual fund to an ETF, with the symbol EVSM, here at the NYSE. This municipal bond fund offers a yield of approximately 3 1/2%, translating to an almost 6% taxable equivalent yield. These rates are highly appealing in the current environment," Rochte added.

‍

In summary, despite the Federal Reserve's plans to reduce interest rates, Gallegos and Rochte advocate for a cautious approach, suggesting that investors explore fixed-income investments, particularly through ETFs focusing on intermediate-term bonds and municipal bond funds, for potential income-generating opportunities and to mitigate risks associated with interest rate fluctuations.

‍