A swift succession of interest rate cuts may not be in the cards for 2024. The Federal Reserve is deciding whether to hold rates steady yet again. So it might be an opportune time for fixed income investors to take advantage of short-term debt while yields stay elevated.
In the meantime, waiting for rate cuts will be a game of patience. And the market rally near the end of 2023 may have already priced in said cuts. At the very least, investors can take solace that there probably won’t be anymore rate-hiking to keep inflation in check, but nothing is ever certain.
“The Federal Reserve on Wednesday sent a tepid signal that it is done raising interest rates but made it clear that it is not ready to start cutting,” reported CNBC.
“In a substantially changed statement that concluded the central bank’s two-day meeting this week, the Federal Open Market Committee removed language that had indicated a willingness to keep raising interest rates until inflation had been brought under control and was on its way toward the Fed’s 2% inflation goal,” the report added.
Of course, the next shoe to drop will be rate cuts. But as mentioned, it could be a slow and steady walk toward cuts as opposed to a swift sprint. The data-dependent Fed will continue to monitor the economic analytics before coming to a conclusion that cutting rates can commence. The report noted that Fed Chairman Powell doesn’t foresee rate cuts by March. So a first-quarter rate cut doesn’t appear to be happening.
“We want to see more good data. It’s not that we’re looking for better data, we’re looking for a continuation of the good data we’ve been seeing,” he said.
A Short-Term Option
As mentioned, while the Fed mulls whether the time is appropriate to cut rates, fixed income investors can continue taking advantage of short-term yields. One fund to consider is the Vanguard Short-Term Bond Index Fund ETF Shares (BSV ).
BSV seeks to track the performance of the Bloomberg U.S. 1–5 Year Government/Credit Float Adjusted Index. This index includes a diverse array of bond exposures. They include all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities between one and five years and are publicly issued. With its low 0.04% expense ratio, BSV boasts a 30-day SEC yield of 4.45% as of January 29.
For more news, information, and analysis, visit the Fixed Income Channel.