RIZ HUSSAIN: For our Q4 investment outlook for advisors, I’m Riz Hussein with two minutes on fixed income opportunities for your clients.
As we start the fourth quarter, we believe that markets are pricing in at least one more Fed rate cut for 2025, with more to potentially come in 2026. Meanwhile, interest rate volatility has fallen from the highs earlier this year, even as some uncertainty remains between the economy and the labor market. Given this backdrop, we think that high quality intermediate maturity credit, for example, investment-grade corporate and municipal bonds offer attractive, tactical, and long-term opportunities. Here are three points we think are worth highlighting to your clients.
First, with the Fed in easing mode, we believe clients should revisit their fixed income allocations broadly, particularly considering reinvestment risk of lower yields if they hold shorter maturity instruments like money markets and treasury bills. Sure, both have an ongoing role, but clients that are still heavily allocated to short duration may miss the opportunity to lock in higher yields for longer.
Next, consider the role high quality bonds can play in rebalancing. After several years of strong equity returns, clients may have larger equity allocations than intended. Rebalancing can potentially reduce overall portfolio volatility while providing a better balance between account growth and income, helping keep your clients in step with their financial plan.
Finally, what looks attractive here in fixed income in the fourth quarter? We favor intermediate duration, where clients can get most of the yield of longer duration bonds with less interest rate risk. More specifically, companies with investment-grade ratings have managed their balance sheets exceptionally well, resulting in a multi-year overall lift in credit quality. Meanwhile, some volatility earlier this year in the municipal bond market has created some opportunities leaving tax-equivalent yields for those in the highest income brackets at what we think are attractive levels.
When thinking about these opportunities, keep in mind that Schwab Asset Management offers a range of solutions from mutual funds and low-cost transparent and tax-efficient ETFs to active separately managed accounts that complement each other well.
If you have any questions about fixed income, and how to position strategies into clients’ portfolios, please reach out to us for a complimentary portfolio evaluation. And thanks for watching.
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