The times are suiting fixed income

Notwithstanding the uncertainties surrounding the US Presidential Election, Principal Asset Management is upbeat about fixed income markets as the Federal Reserve kicks off what is regarded as a rate-cutting cycle.

In a white paper issued this week, Principal AM’s Fixed Income chief investment officer, Michael Goosay has suggested that, moving into the last quarter of 2024, the landscape for fixed income has shifted meaningfully.

He said that while the upcoming US Presidential Election and potential labour market volatility might introduce some headwinds, easing monetary policy provided a favourable backdrop for fixed income investors.

“With attractive yields and strong fundamentals across asset classes, we remain optimistic about the potential for further gains, particularly as duration opportunities emerge and global central banks continue to ease their policies,” Goosay said.

More generally, he said that he anticipated the Federal Reserve moving from restrictive to slightly more accommodative policy and expected the Fed Funds rate to reach 3.25% by mid-2025.

“Historically, when the Fed begins to ease monetary policy, it often becomes an important tailwind for fixed income,” he said. “Given that investors have heavily favoured money market funds and short-term maturity products in recent years, the onset of the rate-cutting cycle should encourage savvy investors to extend further out on the yield curve.”

“By reallocating funds into assets with higher yields and greater sensitivity to interest rate changes, they can better position themselves to benefit from the evolving market environment.”