Rates have already come down once this year, but with another Fed meeting on the horizon portending a further potential cut, investors may be looking at their options. That shifting rate environment presents opportunities for investors as well as some potential pitfalls. T. Rowe Price leaders recently joined VettaFi head of research Todd Rosenbluth for a webcast to talk about how active investing can help.
See more: Adding Municipal Bonds? Don’t Ignore Active ETFs
The webcast, “How to navigate a challenging rate environment,” saw T. Rowe Price Fixed Income Investment Specialist Franco Ditri, CFA and T. Rowe Price Senior ETF Specialist Timothy Gilligan, CFA join Rosenbluth to discuss. With a potential additional Fed rate cut in October, the pair of T. Rowe Price leaders assessed the landscape and options for investors in response to Rosenbluth’s questions.
Rosenbluth asked Ditri to speak to his outlook on cuts for the rest of the year. Adding color, Ditri spoke to the factors that the Federal Reserve board may well be considering in their decision making process.
“Our view is that we expect another two cuts this year of 25 basis points each. The big question mark for us is what happens next year,” Ditri said. “We think the first six months of 2026 could be a question mark. We might not see a lot from the Fed, but the labor market is certainly what the Fed is keeping its eyes on, and that’s why they cut 25 basis points, and that’s why we think we’ll see another 25 two more times this year for another 50 basis points being cut.”
Active Investing and Fixed Income in a Falling Rate Environment
As for what that means for investment options, both Ditri and Gilligan had their own thoughts. Rosenbluth asked the duo about active investing as an approach to fixed income amid falling rates. He noted that passive fixed income approaches, like the U.S. Aggregate index with its 14,000 bonds, make it difficult to recreate an efficient portfolio.
“When we hear all the discussions about the concentration of the (Magnificent) seven and equity indices, it might be a bit easier to replicate those indices, but in the bond markets, it is almost virtually impossible to recreate an index,” he added. “When you take a look at it, that’s what allows T. Rowe Price to generate performance and return by using our credit research, and deciding what we actually want to have in the portfolio instead of just buying in essence the largest issuers of debt.”
Gilligan opined on one of the firm’s options for that landscape. He spoke to how a declining rate environment might position a short duration bond ETF as an appealing option.
“As (Ditri) just pointed out, we’re in a declining interest rate environment, and if everything plays out the way we predict and you get two interest rate cuts, investors sitting in cash or cash-like products are going to feel the brunt of those rate cuts almost immediately,” he said. “You can look at a product like TBUX again, all investment-grade, multi-sector bond fund, our average weighted maturity there can be 1.5,” he added. “And so we can extend our duration out, we can capitalize on higher yields for longer than a money market can.”
Active ETF Considerations
The T. Rowe Price Ultra Short-Term Bond ETF (TBUX ) charges a 17 basis point (bps) fee to actively invest in that space, as Gilligan noted. The T. Rowe Price QM U.S. Bond ETF (TAGG ) is also a compelling choice at only 8 bps, Gilligan said, with its active advantage standing out relative to bond indexes.
“Seventy percent of the AGG is Treasury, agency, government-backed debt … that’s a lot of concentration risk backed by one issuer,” he said. “We just don’t think that that is appropriate for most individual investors, especially long-term investors, because treasury agency debt tends to be lower-yielding debt.”
“So if you look at TAGG, TAGG is our attempt to build a better index,” he added. “We effectively underweight our treasury agency debt by a magnitude of roughly 10%. We reallocate that to short-term corporates, which we get a nice little pick-up and yield from that. But to prevent us from being in an environment where we outperform as spreads tighten and underperform or spreads widen, we compensate for that risk by taking down our long-term corporate debt.”
Together, active bond funds like TAGG or TBUX can provide some notable alternatives for investors. Overall, active investing can boost fixed income portfolios for an uncertain rate outlook.
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