With the upcoming presidential elections and interest rate cuts looming, advisors face significant challenges in the months ahead figuring out how to lock in optimized fixed-income yields ahead of rate cuts.
Investors chasing rates shoveled $6 trillion into money funds. But with a September Fed rate cut likely, cash won’t be king anymore, predicted two managers of the Weitz Core Plus Income Fund in an interview with Financial Advisor. It’s already difficult to find a six-month CD paying 5%.
But the Weitz Core Plus Income fund, co-managed by Nolan Anderson and Tom Carney, had a 9.8% return for the year as of August 21, with a 4.81% return for the year. The fund (whose ticker is “WCPNX”) manages $2.5 billion; it just celebrated its 10th anniversary and is rated in the 95th percentile for midrange core bond funds by Morningstar, which has earned it a five-star rating.
Interest rates and bond prices have historically had an inverse relationship. So when interest rates are cut, the prices of bonds go up and new bonds are usually issued with a higher yield.
With the market telegraphing as many as eight rate cuts though 2025, the question for advisors is: Do you hold onto your money markets paying 5.5% or look for longer-term fixed-income instruments and bond funds now? Do you lock in Treasurys paying 3.5% today or hold out for 5% when the Fed starts cutting rates?
“We think it’s wise to extend duration now before cuts,” Anderson said. “But how you extend duration matters. We would lean heavily on if you are going to extend duration, do so in a high-quality format.”
While the core category was flat at end of first quarter, “money markets are paying 5.15%. We’ve seen pretty strong returns recently in the intermediate part of the curve,” he said.
The Weitz Core Plus Income Fund investments currently have an average 5.5-year duration.
“We have Treasurys and floating-rate securities to offset weakness in the long run,” Anderson said. “We’re also using high-quality mortgage- and asset-backed investments and collateralized loan obligations in the three- to seven-year range, which account for about 60% of the portfolio. We have investments all along the interest rate. We think of it as an all-weather portfolio.”
The managers especially like asset-backed securities in cell phone towers and data centers.
Party Over?
But for right now, investors and advisors do not want the party to end.
“Our money market is at 5.15%. You can’t find that anywhere in the Treasury world, so I can understand advisors wanting to wait it out,” said Carney, who is also vice president at Weitz Investments.
“But of course it’s always about getting in the best position to earn the most for clients,” he added. “It hasn’t hurt to sit in cash for now. But at some point, the opportunity cost can be high.”
Still, some advisors are holding tight to higher-yielding and often short-term instruments.
Despite a rate cut looming, “I'm still tilting towards the shorter part of the yield curve,” said Paul N. Winter, president of Five Seasons Financial Planning in Salt Lake City. Winter said that despite Fed cuts, he isn’t convinced that the longer part of the yield curve will participate in a bond market rally given the ballooning budget deficit.
“I just don't think longer-duration fixed-income is that attractive if you look at its components in a historical light,” Winter said. “With 10-year TIPS yielding about 1.8%, implying 10-year inflation expectations of a bit more than 2% (with 10-year Treasurys yielding 3.87), and with credit spreads being fairly tight, I just don't see the value in the long end of the curve being that compelling in comparison with shorter-duration fixed income.”
Michelle Petrowski, founder of the wealth management firm Being In Abundance in Phoenix said, “While it’s “possible the Fed will reduce rates at the next meeting in September and that will eventually reduce the interest rates earned on cash-like investments, neither you nor I have a crystal ball.”
If you believe rates will be reduced, she added, “review your cash situation and time lines needed for cash. Maybe now is the time to evaluate longer-term instruments like CDs and evaluate whether laddering CDs, individual bonds or Treasurys make sense for your unique situation.”