Kathy Jones, Chief Fixed-Income Strategist at the Schwab Center for Financial Research, joined Keith Black, Managing Director of RIA Channel, to discuss client concerns about how monetary and fiscal policy will impact markets in 2024.
The most significant risk that concerns investors is how long the Fed will stay on hold before starting a campaign to ease interest rates. Another key concern is how the market can manage rising budget deficits and the increased issuance of Treasuries. Jones wonders which market participants will step up to purchase the rising supply of Treasury debt.
There is a risk that the economy will be so resilient that the Fed will delay the rate cuts that the market has been expecting. It has been at least fifteen years since investors had today’s opportunity to earn over 5% on five-year bonds without taking much credit risk. Investors may consider mixing short and intermediate maturities in their fixed-income portfolio, implementing a ladder or barbell strategy with an average duration of five to six years.
Investors may wish to allocate to higher credit quality strategies, as the high-yield market may be challenged to refinance at reasonable rates as the maturity wall looms. After enduring low rates for so long, investors should be happy with a 6% yield on investment-grade bonds and not reach for yield on investments with lower credit quality. Municipal issuers have relatively strong balance sheets and offer attractive tax-equivalent yields.
Resources:
Podcast: How Do Muni Bond Credit Ratings Work?
Podcast: Earnings Season and High Demand for Corporate Bonds