Rotation to Duration: Seeking a More Resilient Portfolio

Key takeaways

  • We believe the Fed’s current rate 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 the 1980. The Fed’s last rate hike was in July 2023 and financial markets are continuing to price that the central bank will remain on pause given stickier inflation and stronger-than-expected economic data (Figure 1). The markets are pricing that the Fed may began cutting rates in Q3 2024.

feds cut

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).