Rate Uncertainty Creates Advantages for Active Fixed Income

After the latest policy meeting from the Federal Reserve, it’s increasingly becoming clear that the Fed isn’t certain about the state of play for the U.S. economy either. The committee has opted to hold rates steady and continue its “wait and see” approach.

In a press conference following the meeting, Fed Chair Jerome Powell observed that federal actions in trade, immigration, regulation, and fiscal policy are still evolving. As such, it remains too uncertain to fully ascertain how these policies will shift the economy down the line. Keeping this in mind, Powell noted that the Fed will continue to evaluate incoming economic data to best chart a course forward. 

“We don’t think we need to be in a hurry,” added Powell. “We think we can be patient. We’re going to be watching the data. The data may move quickly or slowly, but we do think we’re in a good position where we are to let things evolve and become clearer in terms of what should be the monetary policy response. 

While the Fed might be comfortable taking things slow with their rate regimen, advisors and investors are making their own bets on when the Fed will begin to take action. The CME FedWatch tool shows growing market sentiment that the Fed will trim rates later this year. 

FedWatch tool aside, a number of different outlooks from firms and advisors have previously expected the Fed to trim rates two or three times for 2025. That being said, if the latest Fed meeting could serve as any indication, nothing is set in stone as of yet. 

Now, a contrarian view on the Fed is beginning to take hold in the options market. Bloomberg reports that options traders are flocking to futures contracts that are betting on the Fed not cutting rates at all this year. 

Regardless of whether you’re talking to a retail trader or the Chair of the Federal Reserve, expectations for 2025’s interest rate cycle seem murky at best. This can make it difficult for advisors to build a fixed income portfolio that they are truly comfortable with. 

Whenever investing situations seem uncertain, active management could offer a potential solution. This is especially true when it comes to approaching a fixed income strategy. 

Yield-seeking strategies can find a lot of value from active management. Active managers look beyond traditional indexes to locate securities that can serve their investment objectives. Considering the uneven state of play for fixed income at the moment, some bond securities could offer higher value potential than others. However, finding these opportunities could require a more trained eye.

An actively managed fund can help advisors search through the bond market to locate those diamonds in the rough. By doing so, active funds can lock in potential yield that may otherwise be missed by an indexed strategy.

Active fixed income offers more distinct advantages than just yield potential. Crucially, active fixed income funds can be quicker to adapt to changing macroeconomic conditions than their passive counterparts. 

Given the relative uncertainty of the Fed’s rate-fighting future, this flexibility may turn out to be more valuable than ever. Should the Fed opt to cut rates, an active fund could quickly recalibrate its portfolio to capitalize on this. Inversely, if inflation proves too potent to move rates down, active funds could opt for a more defensive stance. 

Traditionally, active fixed income strategies tend to have higher expense ratios than their passively managed counterparts. However, the advantages that active managers can bring to the table could far outweigh the opportunity cost. 

Looking ahead, it’s still too early to tell how Powell and the Fed will handle rate cuts this year. However, regardless of the outcome, active fixed income may just offer the flexibility to stay ahead of the game. 

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