Where should advisors and investors be looking to find the best opportunities in fixed income?
Given the current macroeconomic picture, now is certainly a good time to consider shifting one’s fixed-income portfolio. For instance, new leadership will be taking the reins at the Federal Reserve later this year. This may lead to more interest rate cuts from the Fed down the line, therefore cutting into cash rates as well.
Plus, ongoing macroeconomic uncertainty within the U.S. is still making it difficult to project what the next months may hold. Inflation concerns are still lingering, which could affect the pace and intensity of the Fed’s interest-rate cuts.
Putting all of this together, what kind of strategy could offer the strongest long-term potential for portfolios? One option could be to increase one’s allocation to municipal bonds.
Not only did municipal bonds generate strong returns in 2025, but many muni yields began the new year in a relatively elevated position. Furthermore, municipal bonds tend to perform well during bouts of inflation, due in part to their tax-exempt perks.
If one chooses to invest in municipal bonds, it could further pay off to allocate to intermediate-duration munis in lieu of short-duration bonds. Right now, intermediate-duration bonds are well positioned to benefit from a shift in Fed policy and a pro-growth agenda from the federal government.
