Bond Investors Need Duration Management

Bond Investors Need Duration Management

The time is now to get out of money market funds and lock in long-term yields.

Reviewed by: Ron Day
Edited by: Staff

Sam HuszczoSam Huszczo is the founder and chief investment officer at SGH Wealth Management in Lathrup Village, Mich.

Jeff Benjamin: What's your outlook on Fed policy for the remainder of the year?

Sam Huszczo: The foundation of this discussion centers around the fact that U.S. debt interest payments are now over $1 trillion and if the Fed doesn't lower rates, 12 months from now this is projected to be $1.7 trillion.

Holding the Fed's stubborn inflation mandate constant, they will do their best to not lower rates over the remainder of this year, with the most likely timeframe of rate cuts coming in the beginning of 2025. But don't count out the unexpected.

JB: Will the Presidential election impact Fed policy? 

SH: [Federal Reserve Chairman Jerome] Powell doesn't want to give the impression that he is impacting election results, but I believe he is a more pragmatic Fed Chair than this. The elephant in the room in predicting Fed policy is acknowledging that you can't predict the unpredictable.

If unemployment were to spike unexpectedly, I believe Powell would lower rates in that moment regardless of where we are at in the election cycle.

JB: Where are the opportunities in fixed income now?

SH: We see the biggest opportunity in fixed income being in bond duration risk management and with starting yields historically being a 90% predictor of forward returns, this means you must be early to the game. This will likely lead to 18 months of second guessing whether you could have timed things perfectly, however we see a bigger risk in being reactionary.

In other words, we would prefer to avoid the opportunity cost of being the proverbial ostrich sticking its head out of the sand.

JB: Where does the yield curve go from here?

SH: Officially the longest inversion in history, though we are starting to see signs of flattening. When rates do go down, the short end should likely lower faster than the long end, but both will see movement.

It really depends on how quickly investors realize that these high rates, that haven't been around for 23-plus years, will go away.

JB: What are the dangers of being in a money market fund right now?

SH: Simply put, complacency. Comfort is the enemy of growth and I predict a lot of individuals will look back at this timeframe and question why they didn't seize these rates long-term before they went away.

Five years from now, money markets versus long-term investment grade bonds should play out akin to the Ant and the Grasshopper's children's fable.

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