For many market participants, the Federal Reserve’s unwillingness to reduce interest rates so far this year is a disappointment. But advisors say it’s good news for fixed-income investors, especially if they act quickly.

“It's never too late to take advantage of higher rates,” said Zachary Scott at Castellan Financial Group in Cantonsville, Md. “There's a lot of cash on the sidelines, which can be moved to a savings account paying 4%. This is especially useful for young clients trying to build an emergency fund.”

And he’s not alone in this view. “Cash is absolutely an attractive asset class now,” said Lawrence Gillum, chief fixed-income strategist at LPL Financial in Charlotte N.C. “If your time horizon is measured in quarters or even a few years, cash is a good place to invest.”

Yet Gillum noted that the yield on cash accounts will drop if and when interest rates come down. Still, he said, “with interest rates unlikely headed back to zero any time soon, cash and money market accounts will likely be a more durable investment.”

But not all cash accounts are alike, cautioned Dan Forbes, a certified financial planner in East Greenwich, R.I. “Many clients have not been proactive in reviewing the interest they’re receiving on money held at the bank,” he said, adding that choosing a different type of account, such as a money market account or certificate of deposit (CD) instead of a regular savings account, or switching to a different bank altogether, can help. “The goal is to possibly increase very low-interest money into money earning 4% to 5%,” he said.

On the other hand, although money market funds are “a fine option for investors who need access to cash, especially those with regular cash needs for things like quarterly tax payments, [even their high rates] can decrease quickly if we hit an economic rough patch and the Fed lowers short-term interest rates faster than expected,” cautioned Chris Robbins at Bartlett Wealth Management in Cincinnati.

He suggested being “proactive by investing some cash into bonds to lock in some yield,” citing one- and two-year Treasury notes with more durable yields that are “slightly higher than most money market rates.”

Joe Boyle at Hartford Funds in Philadelphia agreed. Moving some existing cash balances that have built up over the past several years into higher quality, intermediate-duration” bonds is prudent, he said. “Capital appreciation potential exists in bonds which can’t be said for cash,” he said.

Eric Lutton, CIO at Sound Income Strategies in Fort Lauderdale, Fla., said money market accounts and CDs have “reinvestment risk. ... You’ll be forced into lower yields once these securities mature.“

Not All Bonds Are Alike
Among bond options, some advisors argue that longer-term durations may be the best choice, though their current yields lag behind their shorter duration counterpoints. “Purchasing intermediate or long-term bonds is the best way to lock in rates,” said Christopher Van Buren at LVW Advisors in Pittsford, N.Y.

Owning intermediate maturity bonds “allows investors to lock in yields [and] likely see a rise in principal when the Fed cuts rates,” said Jason (Jay) Hendricks at Crestwood Advisors in Darien, Conn. With Treasury bills, he added, you have “the flexibility to reinvest as opportunities arise, with little fear of having a negative return in the event they are sold before maturity.“

Dustin Wolk at Crescent Grove Advisors in Milwaukee recommends that clients with short-term bonds “modestly extend duration. .... Current yield levels are historically attractive for long-term investors.”

A similar sentiment was expressed by Scott Pike and Allison Walsh of Income Research + Management in Boston. “Currently, we are having conversations with many clients about extending their duration/maturity spectrum and locking in these higher rates for longer,” they said in an email. They recommend a mix of Treasurys, high-quality corporate bonds, and securitized debt—i.e., securities that bundle mortgage loans and other debts from different sources. This combination, they said, “allows an investor to move out the [yield] curve and lock-in current high rates.”

Rob Williams of Charles Schwab in Denver highlights investment-grade corporate bonds. Corporate fundamentals are “relatively strong,” he said, and the bonds “are one of our strategists’ preferred ways currently to extend duration, for investors who can diversify sufficiently by issuer and are comfortable with credit risk.”

For clients in high tax brackets, he also suggests tax-advantaged municipal bonds. “Absolute yields after taxes on munis remain attractive relative to Treasurys,” he said.

David James at Coastal Bridge Advisors in Los Angeles echoed the sentiment. Yields are currently “attractive,” he said, on Treasurys, high-grade corporates, and municipal securities. “Reaching for additional yield by reducing the quality of your securities makes little sense,” he said, since the difference in yield would be negligible.

Yet other advisors contend that riskier Treasury-beating bonds do exist for those willing and able to find them. “Identifying attractive opportunities to pick up incremental yield over Treasurys requires a lot of credit analysis and willingness to dig into smaller deals that might not quite garner the same attention from the street,” said Doug Tommasone, a portfolio manager at Fiduciary Trust International in New York City.

“It’s really a question of risk, right?” said Jason Barsema at Halo Investing in Chicago. “Bond investors seeking higher returns can venture out onto the risk curve through corporate credits. Right now, though, there isn’t much risk premium for owning corporates.”

Bullish On Bonds
Nevertheless, many advisors remain bullish on bonds. “Fixed income as an asset class is as attractive as it has been in over 15 years, offering investors an attractive current income as well as a total return potential from price appreciation as the Fed starts cutting rates and yields decline,” said Ruben Hovhannisyan at Trust Company of the West in Los Angeles. “The market is currently pricing in less than two interest rate cuts this year and roughly three more cuts in 2025, but we believe that once the Fed starts cutting interest rates it will likely cut more and faster than what is being priced into the market.”

Ken Roban of Reservoir Road Wealth Management at Steward Partners in New York City put it this way: “For investors who have been sitting in cash or who have let their equity allocations grow at the expense of fixed-income allocations, this might be a great time to rebalance. Don’t be afraid of bonds.”

For some clients, he recommends inflation-indexed bonds, or “I bonds.” Backed by the U.S. Treasury, I bonds have a base interest rate of 1.3% plus an inflation component that’s recalculated twice yearly andis currently at 2.98%, for a total return of 4.28%. Though that pales in comparison to the 9.62% they were paying in late 2022, it “does not make I bonds any less attractive today [for clients who want] a diversified long-term wealth-accumulation strategy,” he said.

They have a 30-year maturity, and no federal taxes are due on the income until the bonds are cashed, he noted. Yet he acknowledged some negative aspects: You cannot sell the bonds for 12 months (known as the “lock-up period”), withdrawals made in the first five years are slapped with a penalty equivalent to three months’ interest, and the maximum investment is $15,000 a year ($10,000 electronically plus $5,000 on paper, purchased with federal income tax refunds).

For inflation protection, some advisors prefer Treasury Inflation-Protected Securities (TIPS). Issued by the U.S. government and indexed to inflation, TIPS have a fixed interest rate with a principal amount that adjusts with inflation to maintain their real value.

“This provides significant inflation protection with well-structured investment risk,” said Jonathan Treussard of Treussard Capital Management in Los Angeles. He acknowledged that their “tax treatment is not ideal” since investors pay taxes on unrealized principal appreciation, and their complexity can be daunting. But TIPS “can be valuable portfolio building blocks for long-term horizons,” he said.

Bond Funds Versus Laddering
Another question is what’s the best way to hold bonds. Buying individual bonds and holding them through maturity can be better than investing in a bond fund, according to Erin Wood at the Carson Group in Omaha, Neb. “If you buy a bond fund, you are investing in a pool of assets with other investors,” she said. “In down markets, investors tend to sell holdings, frequently forcing the bond fund to sell assets, [which] can impact the interest rate but also the value of the fund negatively.”

Ross Mannino at Ameriprise Financial Services in Greenwich, Conn., recommends a “barbell approach.”

“Buy short-term bonds to satisfy your liquidity needs while simultaneously buying long-dated bonds to lock in higher yields,” he said. This is distinct from a traditional bond ladder, he explained, which would involve owning multiple maturities staggered for different time frames. “A bond ladder is great strategy when short-term rates are lower than long-term rates, which is not the case today,” he said.

Nevertheless, Matt Nest at State Street Global Advisors in Boston said bond laddering can still make sense for clients who “want certainty around cash flows at a specific horizon—such as if they have to pay for college or are saving for a house or have other specific cash needs over the next three, five, or 10 years.”

Of course, it’s impossible to predict exactly when or even if the Fed will slash rates. “Much like the idea of timing the markets when investing, timing interest rate movements is not recommended,” said Diego Verdugo at Principal Financial Network in Phoenix.

Some aren’t even sure that rates will come down this year. “I don’t believe rate cuts in 2024 are a forgone conclusion,” said Andrew Grant at Kayne Anderson Rudnick in Carlsbad, Calif. “We’re still seeing hotter than expected inflation.”

Still, he stressed the importance of “staying on top of rate moves.”

There are certainly no pat answers. The case for redeploying cash into investment-grade bonds is “more compelling [than it] has been in a long time,“ said Jeff Glenn at Breckinridge Capital Advisors in Boston.

Cash accounts might seem safest, observed Greg Wilensky of Janus Henderson Investors in Denver. But if rates fall, bonds will experience price appreciation while cash accounts won’t. “Investors who are parked in cash and waiting for some clarity around the future of the economy may find more risk in their approach than meets the eye,” he said.

Rate changes should be kept in perspective, said Chris Tidmore at Vanguard’s Wayne, Pa.-based Investment Advisory Research Center. “Understanding your clients’ goals and objectives and the role fixed income is playing in reaching those are the most important things to focus on,” he said.