What does it mean for your fixed income holdings if bond rates move up, down, or stay the same?

When bond yields go up, notes with short-term maturities (2 years or less), floating rate bonds, and newly invested funds for bondholders will often stand to benefit the most.

When bond yields go down, existing investors with notes of medium and longer-term average maturities (5+ years), higher quality credit ratings (AAA to AA average Fitch rating or equivalent), and a fixed rate will often stand to benefit the most.

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When bond yields stay the same or fluctuate up and down, bondholders with diversified, laddered, or barbell-style portfolios of fixed income instruments will often stand to benefit the most. Keeping an eye on yield spreads (how much more do I earn for taking the risk on lower-quality debt notes?) and supply/demand elements (am I paying a premium or a discount to purchase these debt instruments?) further helps delineate prudent fixed income management from chasing yesterday’s returns.

The gold medal for most asked question from our clients this year goes to...

“What do you think the Federal Reserve will do?”

There are compelling reasons for the Federal Reserve to consider a variety of options each time they meet. Among the data they are now considering:

  • Unemployment figures are low, and housing and energy prices have remained stubbornly high – this could indicate that the Federal Reserve might want to keep rates high or even increase them further.

  • Wage growth has started to flatten out, defaults on consumer loans have begun to rise, and business lending has cooled – this could indicate that the Federal Reserve might want to begin lowering rates.

  • The core Personal Consumption Expenditures Price Index, the Federal Reserve’s preferred method of measuring inflation, rose by 0.2% to 2.63% in June 2024, and appears on track to normalize at 2.5% without additional intervention in the not-distant future – this could indicate that the Federal Reserve might want to keep rates steady.

Want to try and predict which way the Federal Reserve will go? Consider flipping a three-sided coin each time they meet, with sides labeled: rates go up, rates go down, rates stay the same.

Regardless of which direction the Federal Reserve moves (or doesn’t), fixed income holdings can accomplish many goals in a portfolio: preservation of capital, defraying correlation of investment risks, provision of current income, supplementing traditional banking products like savings accounts or certificates of deposit.

If you don’t happen to have a three-sided coin handy, please contact us at OI@eder.org to schedule a meeting to discuss your existing bond holdings, our diversified menu of fixed income offerings, and how the decisions you make today can enthuse your missions of tomorrow.

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