The anticipation of interest rate cuts is causing investors to scramble for bond yields now before monetary policy loosens. Fortunately, this demand has been met by record issuance in the beginning of this year. To ferret out opportunities, an active strategy can help.
The scramble for yield is warranted given that global credit spreads have tightened to start the year. Bonds in the current market offer an ideal fixed income solution as opposed to sitting on cash and similar investments.
“More investors have been flocking to bonds in 2024 to capture today’s higher bond yields before the Federal Reserve starts cutting interest rates,” a Market Watch report said. It noted that when “rate cuts come, earning 5% by sitting in cash and cash-like investments can quickly evaporate, especially if the Fed ends up responding to a crisis by deeply cutting its short-term policy rate.”
Retail investors aren’t the only ones taking advantage of the high-yield environment. Life insurance companies, for example, are eager to add new higher-yielding assets to their portfolios. That’s as opposed to being saddled with comparatively low yields amid the Fed’s aggressive interest rate hikes the past few years.
“A regulatory change has given life insurers an opportunity to trade out their underwater holdings of long-term corporate bonds — those hurt worst by rising US rates — for newer securities issued at higher coupons,” a Financial Times report confirmed.
Pliability in a Changing Bond Market
With the expectation of rate cuts to come, volatility is a certainty for the bond markets through 2024. That said, having an active management strategy that maintains pliability in a changing market is almost imperative. That active component is inherent in the ALPS/SMITH Core Plus Bond ETF (SMTH ).
SMTH seeks above average total return from a combination of current income and capital appreciation. That investment goal speaks to the duality of high yields in the current environment. And that paves the way for bond price appreciation when rate cuts occur.
This is where having the luxury of active professional managers who have the ability to adjust the fund’s holdings when a change is warranted can be beneficial. Thus, SMTH investors have peace of mind knowing that they’ll have an ideal balance of yield and bond price appreciation. The fund has a 30-day SEC yield of 4.38%, as of February 29.
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