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After another rate hike from the Federal Reserve, advisors are watching closely for signs of future moves by the U.S. central bank that may spark changes for bond portfolios.
In its continued battle with inflation, the central bank on Wednesday announced another quarter percentage point interest rate increase. Meanwhile, the Fed is weighing its next move amid the threat of a recession and other factors.
The latest rate increase comes after annual inflation eased to 5% in March, down from 6% in February, according to the U.S. Bureau of Labor Statistics.
One of the big questions for advisors is whether to start shifting back to longer-term bond allocations, which may offer a higher yield.
When building a bond portfolio, advisors consider so-called duration, which measures a bond’s sensitivity to interest rate changes. Expressed in years, duration factors in the coupon, time to maturity and yield paid through the term.
As interest rates started rising in 2022, many advisors opted for shorter-duration bonds to protect portfolios from interest rate risk. But allocations may begin to shift, depending on future Fed policy.
“I don’t see us moving much higher from an interest rate perspective,” said certified financial planner Kyle Newell, owner of Newell Wealth Management in Orlando, Florida. “So that should be good for bonds moving forward.”
Newell says he’s still in the “evaluation process” and is hesitant to extend the duration for corporate or municipal bonds, which may be more vulnerable to default in a possible recession. However, he may start to increase his clients’ bond duration within the next six months.
Jon Ulin, a CFP and managing principal of Ulin & Co. Wealth Management in Boca Raton, Florida, is also still focused on shorter-duration bonds and higher credit quality. “I’d rather be late to the game in getting into longer-term bonds,” he said.
If we start to see the Fed cutting rates by the fourth quarter, that may be a signal to increase duration by getting back into seven- to 10-year bond funds, Ulin said. But it may take another six months to see the results from the Fed’s series of interest rate hikes, he said.
Either way, “there’s never been a better time for investors to be in a diversified portfolio, with all the uncertainty,” he said, noting that a Fed rate pause may be an “ominous sign” the economy may slow down.