Fixed-income opportunities in a lower-rate environment 

As the Federal Reserve shifts from taming inflation to boosting growth, significant changes are expected in the fixed-income market. This transition could unlock new opportunities for investors, says Jeff Mayberry, a fixed-income asset allocation strategist and portfolio manager at DoubleLine Group in California.

“It’s really a good time to be a fixed-income investor,” Mayberry said.

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Mayberry said the Fed could begin reducing its benchmark rate as early as September. The market has priced in four to five rate cuts to the end of 2024, and more aggressive reductions into 2025, he said.

“We’re at an inflection point now where, assuming that inflation continues its current trajectory, the Fed is changing its outlook from worried about inflation to worried about growth,” he said. 

Chairman Jerome Powell confirmed as much in his keynote speech at the Fed’s annual economic conference in Jackson Hole, Wyoming, on Friday.

“The time has come for policy to adjust,” Powell said.

The shift is prompting a reassessment of investment strategies, Mayberry said. 

In recent years, many investors have favoured U.S. Treasury bills due to their low-risk profile and attractive yields, especially with the yield curve being inverted since July 2022. However, the expected rate reduction creates an opportune time to explore fixed-income investments that offer higher returns, Mayberry suggested.

“You can lock in fixed rates today that are higher than T-bill spreads,” he said. “While there’s a bit more credit risk or duration risk, you’re being compensated for it currently, and it’s a chance to secure these higher yields compared to where T-bills are.”

Acting before rate cuts could benefit investors, Mayberry said. 

“If you wait until the Fed starts cutting, the markets will have already reacted,” he said. “It makes sense to move into different fixed-income markets before this happens.”

Mayberry highlighted the potential in products such as commercial mortgage-backed securities (CMBS) and agency mortgages. He said CMBS, for example, are priced for a mild recession, which could mean less volatility in yields and spreads compared to sectors like U.S. corporate high yield, which are priced for a no-recession scenario.

Agency mortgages, meanwhile, have had wide spreads over the past several years, and provide a low-risk yield advantage over Treasurys, he said.

Looking ahead, Mayberry considered the implications of the high U.S. budget deficit, particularly in a recession scenario. He warned that a significant fiscal response to a recession could expand the deficit, potentially leading to higher yields on bonds as investors demand greater compensation for increased Treasury issuance. 

He recommended strategic portfolio management to hedge against various economic outcomes.

“Putting together a portfolio that can take advantage of both different scenarios is a good opportunity for investors out there,” Mayberry said. 

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