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Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

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Preparing your Portfolio for Rate Cuts

For investors looking to actively position their portfolios in anticipation of a turn in rates, here is a look at 5 asset classes and investments that have historically performed well when rates fall. Of course, past performance is no guarantee of future results.
From Fidelity:

5 investing ideas for falling interest rates
learning-center/trading-investing/5-invest-ideas-lower-interest-rates
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Comments

  • All depends on the landing. If we get a recession Treasuries are the place to be.

    Anybody else lengthening the duration of their bonds? With what vehicles?

    While High Yield has held up I am getting more cautious here too
  • I'm building a position in ZROZ
  • I picked up a slice of TLTW.
  • edited August 17
    LOL - Wish it were that simple! However, I have not held much cash for many years. I understand that the hypothetical, highly rumored, speculated and anticipated “Fed rate cut” would impact those who have been sitting in cash for the past year (while the S&P 500 rose 28%).

    I’m trying to get my head around where to cull a little risk without dumping any apples out of the cart. Have a substantial TOD position in PRHYX (short-term muni junk fund). I’d have expected to have spent that on a new vehicle or home infrastructure by now - but haven’t for various reasons. I’m thinking next week I may move a good portion of that into SPAXX (money market fund) as a quality upgrade to my fixed income posture. (All 3 accounts, TOD + 2 IRAs, are considered as one for allocation purposes.)

    If things get any crazier next week I might even move a bit of IRA cash into SPDN (2X inverse S&P) as a downside hedge. Prefer that to selling out of any major positions because I think they are good long term holds and not nearly as “bubbly” as the major indexes. I’d liken the froth atop them to be more like the head of foam on a stein of good beer. (Don’t dump out the beer because of the froth.)


    My fixed income funds now (aside from cash):

    - PRIHX

    - WEA

    - LSST

    - CVSIX - Arbitrage fund / Seeks to produce bond-like returns with lower volatility
  • Long term bonds (treasuries or other) are often regarded as useful primarily for placing bets on interest rate movements, i.e. speculating. Most of the time long term bonds don't offer enough extra yield over intermediate term bonds to be worth the risk as investments.

    Currently, though the yield curve is largely inverted, at least you're getting a little risk premium with longs over intermediates.
    https://www.ustreasuryyieldcurve.com/

    Pushing on a string may not be the best metaphor, but the Fed pushes on the short end of the curve. That end has a lot of room to go down without long end yields necessarily dropping.


    10 year Treasuries are still under 4%, while their long term historical average is 4.25%. There's not much room for 30 years to drop in yield if they're going to stay above 10 year rates. 30 year Treasuries are now also below their historical average of 4.74%.

    We've already seen a drop in 30 year rates. Mortgages have dropped half a percent percent in the past month and are not expected to decline further this year, even with an anticipated Fed rate cut.
    https://www.forbes.com/advisor/mortgages/mortgage-interest-rates-forecast/

    All of this is not to say that long term rates won't drop a lot more. Or they might not. When and how much are also open questions.

    Me, I'm sticking with intermediates. Win a little, lose a little, they offer more stability as backup for cash in the 3-7 year timeframe.

    Side note: I suspect that cap gains on Treasuries are not state income tax exempt. While I have been unsuccessful in finding writing one way or the other, there are many sources documenting the fact that cap gains on muni bonds are state taxable. ISTM the situations are analogous.
  • WCPNX. 5.6 years duration. I like what I see there.
  • edited August 17
    D
  • edited August 17
    msf said:

    Pushing on a string may not be the best metaphor, but the Fed pushes on the short end of the curve. That end has a lot of room to go down without long end yields necessarily dropping.

    Nice analysis. I thought the above bears repeating. While I’d expect longer term rates to dip briefly “in sympathy” if the Fed cuts at the short end, after the news is digested by the markets the end result could well be higher rates at the long end. Why? If markets think the Fed is being overly stimulative they may infer hotter inflation down the road. The longer end would need to offer higher rates to attract buyers worried about inflation.

    I’m a very reluctant bond investor. Have no way of predicting the trend. Lived through 20% interest rates in the 70s or 80s. A sobering experience. I’d rather trust the manager of a broadly diversified multi-asset fund to make the bond call. He / she may not know either. But better equipped to make the call than I am.
  • "Lived through 20% interest rates in the 70s or 80s."

    Made a killing on that... bonds out of Utah (Mormons) to build a huge electric generating facility at Four Corners. Terrific income until they were called a couple of years later. It wasn't until fairly recently that I became aware that I had helped build an enormous coal-fired generating complex. Who knew?

  • edited August 18
    Just curious, what was the psychology of retail investors then towards 10, 20, and 30 yr Treasuries when interest rates were 20%. Were retail investors hoovering these instruments, with no risk of being called?
  • Simpler back then to grab a CD at 15%... i knew a guy who did just that.
  • edited August 18
    A blast from the past.

    image
    Photo caption: ”President Ronald Reagan ordered Federal Reserve Chair Paul Volcker not to raise interest rates. It didn’t work.” (Barron’s, August 19)
  • Volker raised rates to their peak under Carter. Rates were cut at the start of Reagan's administration only to be raised again to that peak in June 1981. You can see the twin peaks in the graph below.

    Fed funds rate (blue) vs. CPI Y/Y (inflation; red)
    image

    30 year yields (blue) did not follow Fed funds rates (red) down for almost a year.
    image

    Nor did they fall with inflation.
    Volcker had promised that once inflation starting falling interest rates would follow. Long-term interest rates did not follow Volcker’s prediction and inexplicably rose, despite lowered inflation.
    https://ou.edu/content/dam/cas/economics/Student Journal of Economics publications/Derrick Jones_VolckerJOE.pdf

    30 year yields (blue) vs. CPI Y/Y (inflation; red)
    image
  • edited August 18
    Old_Joe said:

    "It wasn't until fairly recently that I became aware that I had helped build an enormous coal-fired generating complex. Who knew?"

    @Old_Joe, that was the Navajo Generating Station, and it was demolished in 2020, so it's no longer messing with regional air quality and the climate. Video of the three smokestacks coming down here: Vox article.
  • edited August 18
    Compare those chart events with Reagan years (1980-88) and Volcker years at the Fed, 08/1979* - 08/1983** - 08/1987.

    In 1987, rumor went both ways - one was that Volcker didn't want a 3rd term, and another that Reagan wasn't going to nominate him for the 3rd term, had a search setup for possible replacement that was headed by Greenspan. The politician that Greenspan was, he recommended reappointing Volcker, but Reagan nominated Greenspan instead.

    Two months into Greenspan's term, stock market crashed on 10/19/1987 (Black Monday). It had more to do with dollar and some harsh statements that the US Treasury Secretary Baker made about Germany and the US allies.

    BTW, as reported by various sources, it was Baker who said to Volcker that the President was "ordering" him to lower rates. Reagan (who was present) and Volcker didn't say anything. Volcker left the meeting without reacting to Baker's "order".

    *Nominated by Carter
    **Nominated by Reagan
  • edited August 18
    @AndyJ- Yes sir, you are correct on that. Still, 50 years of damage ain't great.
  • Roy
    edited August 18
    Crash said:

    Simpler back then to grab a CD at 15%... i knew a guy who did just that.

    Yes, I was just beginning to work full-time and saving. I remember going around to several institutions buying CD's. From what I remember they were paying maybe 10-12% and had short maturities, maybe no more than a year?

    After that, Templeton Growth was my first mutual fund investment through my account executive at a local Prudential-Bache office.

    No internet/online brokerages yet and no-load mutual funds were just beginning to gain traction.
  • edited August 19
    Yes. 20% in a money market fund - Delaware Cash Reserves. The company is no longer existent.

    Wasn’t all happy. Especially shopping for groceries in the big stores in the northern (Detroit) suburbs. There were always several employees moving up / down the aisles marking items up by hand. No bar codes in those days. Things went up fast. The loaf of bread you paid 50 cents for became 60 cents a few weeks later and 75 cents by year’s end. On and on it went. Not only bread. Meats, staples, everything rising. Year after year. So, after paying federal income tax on your 20% “windfall” you were lucky to end up ahead. Fortunately unions were strong and protected workers with COLA wage raises. To some extent, non union workers benefited indirectly.

    This source shows annual inflation peaking around 18% in 1980 and remaining in double-digits for several years.

    I didn’t sense as much angst among the public back then over rising prices as today. But maybe I wasn’t looking or listening. I think it came on gradually over many years and people got used to it. They say if you put a frog in a pot of cold water and heat it up to a boil slowly the frog will die of the heat rather than jump out.
  • "I didn’t sense as much angst among the public back then over rising prices as today. ... I think it came on gradually over many years and people got used to it. They say if you put a frog in a pot of cold water and heat it up to a boil slowly the frog will die of the heat rather than jump out."

    Inflation is expressed in annual change of price. If inflation goes up from 17% in one year to18% inflation the next year, people will know they are paying 18% more in price than what they paid the previous year. Not sure how people can get used to it.

    It is possible your memory is kind to previous generations or the current populations are more whiny - you have to figure that out for yourself.
  • edited August 18
    I am still curious

    what was the psychology of retail investors then towards 10, 20, and 30 yr Treasuries when those yielded nearly 15%? With no risk of being called, were retail investors hoovering these instruments? If not, why not?

    Were people really thinking of 12-15% inflation into perpetuity?

    I get that markets move much faster now.
  • @Hank. I agree that people today seem way more bent out of shape over what is sort of mild and shorted lived compared to the old days. And inflation is what you make of it too. We bought an old boat, sailed to the sea of Cortez and lived on a small part of the interest our money market account was paying. After three years we had more than when we left. Hank. La Paz, was sure different than the northern suburbs of Detroit where I grew up.
  • edited August 19
    Lucky you, @larryB. I've experienced San Felipe in northern Baja. Amazing extreme tides, like the Bay of Fundy. Low tide, fishing and pleasure boats are sitting on dry ground, way out there!
  • @crash. We never got that far north. We sailed from San Francisco to the cape and then as far north as Loreto. In the summer we went diving every day and even I caught stuff. My dad used to tell me that if it weren’t for sailing I could have been rich. But I have some great sea stories.
  • edited August 19
    Nice @Larry.

    Never did any sailing on a real boat. But hoisted a few beers to The Sloop John B which came out in ‘68 while in college. The linked video is of poor quality, but sound is pretty good. May have been recorded surreptitiously. But greatful someone recorded a part of our music history.
  • Hey Hank. Thanks for finding that. Great stuff. Funny thing about growing up in Michigan,,, The Beach Boys mostly sung about a life we could only imagine except for songs about cars. Did I ever see you on Woodward on Friday nights? Ever been to Ted’s?
  • edited August 20
    Ted’s no. Heard they used to drag race on Woodward. (Catch was probably over there). Saw a few shows at the Gem theatre. A few late afternoon / evening classes at WSU. Some time on the campus of OU as well. The small lakes in Oakland County were great for skating in winter. Bought a beautiful Mercury Montego - loaded - with a 400 cu V8 brand new for $3200 in ‘73.
  • Yes Woodward was for racing for some but just cruising between royal oak and north to Ted’s and back. I was at OU and graduated in 71. My go to lake was Kent or was it Kensington? You could rent a row boat. My first command at sea.
  • edited August 20
    Oh Yeah. Cruising was big along Woodward. I recall hearing of Kensington Lake, but was never there. I put a 14 footer in a couple times on Union Lake.
  • edited August 20
    Apologies @bee. Will stop screwing around. Preparing for Rate Cuts

    - Well, the conventional wisdom is to lengthen out maturity bit. If I wanted to put a lot of $$ into bonds I’d aim for around 3 years maturity. Farther out is a gamble if inflation reignites.

    - Two short term ETFs: I use LSST for a short term bond fund. There are lower fee options if that’s critical to you. On my radar is TDTT which adds an inflation-protection component - also about 3 years maturity. Very low fees.

    - For more conservative folks an ultra-short might get you a bit extra as rates fall. TBUX looks excellent in that category.

    - I’d say keep your inflation hedges up. Lower rates may eventually push it higher.

    - There’s an old expression: “Buy the rumor. Sell the news”. The presumption is that stocks will go even higher if the Fed cuts rates. Maybe yes. Maybe no.

    - The financial world may look much different following the November election. Enjoy the fun for now. Hope it lasts a couple more months. But don’t get too giddy.
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