Recently, the stock market has been unstable because rising Treasury yields have scared investors.
However, the S&P 500 index SPX -0.02% is only 0.9% below the record high it hit a week ago. This is because investors are aware that the Federal Reserve has started a pattern of lowering interest rates.
Traders are taught over and over again to “Don’t Fight the Fed.” What this means right now is that the central bank has the backs of stock buyers.
What about people who want to put money into investments for the fixed-income part of their portfolio?
Matthew J. Bartolini, who is in charge of research for SPDR Americas at State Street Global Advisors, offers three interesting areas to look into as the Federal Reserve lowers the cost of short-term loans and the economy grows enough to make yield curves steepen.
Bartolini says that people who are worried that credit spreads—the difference in yield between “risk-free” Treasurys and corporate debt—are still very narrow compared to the past and could widen should look at a number of reasons that support the case for credit.
The U.S. economy is growing thanks to a strong job market and strong demand from consumers. Profits for businesses are expected to grow for a fifth quarter in a row. So far in 2024, credit ratings are going up faster than down, and the world high-yield default rate of 1.90% is much lower than the long-term average of 3.75%. Lastly, there is still a lot of desire for high-yield issuers.
So, where should buyers put their money to work now that the Fed has cut rates and there is less to offer from the $6.3 trillion held in money-market funds?
First, there are what Bartolini calls “active core strategies for the short term.” “Because securitized credits are part of the bigger opportunity set, an actively managed short-duration strategy may be able to improve income and total return potential,” he says. For a portfolio of 1-3 year U.S. Treasurys, the yield can be raised by adding investment-grade credit with a term of less than 3 years, high yield credit, and MBS while still keeping the rate risk low.
The SPDR DoubleLine Short Duration Total Return Tactical ETF STOT 0.07% is a fund that can show this kind of move.
Next are methods that bring in a lot of money, like investing in high-yield bonds, term loans, and preferred securities. “Those three types of bonds still have yields above 5.5%, and the high coupon may make more people want to buy them. This could be good for total returns and help explain why credit spreads are so low right now.” “And the market for preferred securities is still mostly rated investment-grade,” says Bartolini.
To make this move, you will need the SPDR Blackstone High Income ETF (HYBL -0.07%), the SPDR Blackstone Senior Loan ETF ( SRLN 0.04%), and the SPDR ICE Preferred Securities ETF (PSK -0.24%).
Last but not least, mortgages and core active tactics that focus on mortgages. “Because people expect central bank rates to go down and rates to go down in general, 30-year fixed mortgage rates have gone down and are now trading around two-year lows,” says Bartolini.
“Experts think that a wave of refinancing could happen if mortgage rates fall below 6%.” “And that could help bring duration in, which could cause prices to rise because duration is unusually long right now,” he says.
SPFR Portfolio Mortgage Backed Bond ETF (SPMB -0.14%) and SPDR DoubleLine Total Return Tactical ETF (TOTL -0.07%) are two funds that can be used with this investment plan.
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