• Consider laddering Treasury-Bills (T-Bills). For the last several months short T-Bills have been the best place for advisors and clients to invest hard-earned capital. Laddering from 30 days out to about four months has worked effectively as the Fed raised the federal funds target rate from under 2% to almost 4%, which allows investors to reinvest the short maturing bills as the Fed continues raise. However, as the ten-year to two-year spread continues to invert deeper, history tell us that the economy will slow, just as it did after the tightening cycles of 1994-1995 when GDP fell from 5.5% in 1994 to 1.2% in 1995.
• Mortgage-backed securities may be worth cautious consideration. For the most part, we have steered clear of mortgage-backed securities (MBS) for the last several years due to exceptionally low yields. On the other hand, MBS are close to the cheapest they have been since the great financial crisis by some measures, and institutional investors are beginning to take notice. Keep in mind that MBS are in a world all their own—they are complex and investing in them requires specialized analytics using a Bloomberg terminal or similar resource, and a deep understanding of rates, housing, and the structure of the bond, along with established trading relationships.
• More traditional investments. An alternative to buying individual bonds might be an exchange traded fund (ETF) or even a mutual fund, if the fees are justified for your clients. Also, funds do not mature, which is the primary reason we manage our own portfolios. Mortgage real estate investment trusts (REITs) are also a great alternative for those advisors who do not want to do it themselves or pay an expert to build a separately managed account.
It appears long-term rates and inflation may have peaked, but it’s important to remember that every cycle is different. So, what is a fixed-income investor to do? Investors should approach fixed income investing in 2023 with a few key tenets in mind: consistent cash flow, potential price appreciation and lowering credit risk. By balancing this, advisors can take advantage of higher rates we haven’t seen since 2008. Done right, a thoughtful fixed income approach can deliver a strong portfolio yield, capture potential price appreciation when the Fed starts lowering rates, and help insulate portfolios from a potential recession. While fixed income investing requires a thoughtful approach and deep understanding, doing so successfully can help advisors build more resilient portfolios in the face of these challenges in 2023 and beyond.
Don Burrows is the founder and managing partner of Burrows Capital Advisors. Burrows is based in Galveston, Texas. Click here for more information about Burrows Capital Advisors.