Rotation to Duration: Seeking a More Resilient Portfolio

Key takeaways

  • The potential for a Fed pause presents an opportunity for investors to consider adding duration back into their portfolios.
  • In this market regime, we believe duration serves well as hedge and equity diversifier.
  • Advisors who were underweight bonds in their traditional 60/40 portfolios should consider bringing bonds back to benchmark level or an overweight.

Navigating Today's Environment It's Just Math

Beginning in March 2022, the Federal Reserve (Fed) raised interest rates at the fastest pace since 1980. Financial markets are now pricing in for the central bank to be near the end of its hiking cycle (Figure 1).

The Fed may be pausing soon

With yields at current levels, bond funds can lock in longer term yields, offer price appreciation potential and overall serve as a hedge against a possible hard landing. Though elevated cash balances worked during the Fed’s hiking cycle, we believe now is an opportunity for clients to consider adding duration given the potential for a Fed pause.

While investors are not penalized for being early to adding duration, there is a potential cost to being late (Figure 2). Historically, cash underperforms when the Fed stops hiking (Figure 3).

Act quickly – there’s an opportunity cost to being late. Core bond yields have fallen quickly when Fed stops hiking.

Potential Fed interest rate hike pause and historical bond performance