Undoubtedly, by now, you have heard from multiple sources that the Federal Reserve Bank (“The Fed”) cut short-term interest rates by 0.50% last Wednesday (9/18). There are reasonable expectations that they will make further cuts later this year and in 2025.

For consumers and borrowers in general, this is good news as the cost of borrowing is dropping. Mortgages, car loans, business loans, etc. will all be less expensive.

For savers and investors, the feeling is more ambivalent. The rise in interest rates allowed for healthy returns on savings accounts, money market funds, CDs, and short-term Treasuries. Those returns will decrease as interest rates fall.

What about our fixed-income portfolio?

This requires strategy and patience as interest rates fall.  (Learn more Yield Curve basics from Kevin Slater, here.)   We continue to experience an inverted yield curve when short-term fixed-income investments pay higher interest rates than longer-term investments. We expect the yield curve to normalize (when longer-term interest rates are higher than short-term rates) over the coming year or two. How the market moves to get to that point matters.

To Time or Not to Time

At SoundView, we do not believe in timing markets. However, we do believe there are ways to invest that lean toward higher probability events without going “all in.” For example, maintaining well-diversified equity portfolios while investing a higher proportion in US large-cap stocks - we think they will outperform other areas of the market more frequently. We still invest in many of those other areas but with a lower proportion of the portfolio.

With fixed income, we have invested heavily in shorter-term bonds. This has worked well with a few brief exceptions. We do believe the yield curve will normalize, but when and how are still up for debate. If short-term rates fall while longer-term rates stabilize or rise, short-term bonds will outperform long-term bonds for a while. That has been the case for the past few days, but there is more to come as The Fed makes choices and the markets anticipate their impact.

On the horizon

We anticipate one or two trades in fixed-income portfolios in the next three to twelve months. What and when will depend on Fed policy and market responses. We will continue our work to both preserve capital and generate a reasonable return for our investors.