As Interest Rates Fall, Bond Investors Rejoice: Here’s Why
With the Federal Reserve’s recent interest rate cuts, investors are rethinking their bond portfolios. And for good reason – the dovish Fed policy could bring a welcome boost to certain areas of the bond market. Experts say that as interest rates decrease, bond prices tend to increase, making now an excellent time to revisit bonds.
According to certified financial planner Scott Ward, “This is a fantastic time to revisit bonds again.” Ward suggests that long-term investors can now earn higher returns from the safer side of their portfolios with bonds, rather than relying on cash, which will become less attractive as interest rates fall.
Financial advisors recommend considering medium- to longer-term corporate bonds, which have performed well in the current environment. The Morningstar US Corporate Bond Index, which tracks investment-grade corporate bonds, returned 5.8% in the third quarter of 2024, outperforming the overall bond market.
Municipal bonds are also gaining attention, particularly among residents in high-income tax states. These bonds offer federally tax-free interest and avoid state levies when purchased in the issuing state. With lower default risk than corporate bonds, municipal bonds could become more appealing as investors prepare for potential higher future taxes.
When building a bond portfolio, advisors emphasize the importance of duration, which measures a bond’s sensitivity to interest rate changes. By shifting to medium-term duration bonds, investors can position themselves to benefit from falling interest rates.
As interest rates continue to fall, experts predict that longer-maturity bonds will reward investors. With the Fed’s policy shift, now is an excellent time to reassess your bond portfolio and take advantage of the opportunities presented by the current market.
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