From Morningstar: 2024-09-03 11:51:00

The Federal Reserve is expected to start cutting interest rates in September, likely benefiting bond investors. Uncertainty remains around how far bond yields will drop and which bond market sectors will perform best. Various fund managers are developing strategies based on different potential outcomes.

There is speculation about the extent of long-term bond yield decreases in a robust economy. If growth slowdown escalates into a recession, long-term yields could increase, impacting riskier bonds adversely compared to safer ones.

Market experts predict a rate cut at the upcoming Fed meeting, with a 64% chance of a quarter-point cut and a 36% chance of a larger half-point cut. Expectations for bigger rate cuts intensified after a weak jobs report. Futures markets display varying expectations on the number of rate cuts for the year.

Bond managers analyze the economic trajectory and likelihood of a recession. The Fed is seen as a stabilizing force in case of an economic downturn. Corporate balance sheets are considered strong, decreasing the probability of a recession according to some market experts.

Debates arise around portfolio duration sensitivity to yield changes and strategies to benefit from potential bond price rises. Funds may be positioned differently to address varying market conditions, including yield curve steepeners and exploration of credit spreads to maximize returns.

The bond market grapples with the balance of risk and reward in non-US government bonds at risk of default. Tight bond spreads indicate lower rewards for accepting riskier assets, leading to differing strategies among fund managers. Some opt for caution, while others seek a balance between credit risk and duration exposure.



Read more at Morningstar: How 3 Top Bond Fund Managers Are Preparing for Fed…