Investors parked in cash should consider bonds before the Fed pivots, Nuveen says

By Joy Wiltermuth

Bonds have been rallying in anticipation of the Federal Reserve's pivot to rate cuts this year, but today's higher yields still leave room for buying opportunities, according to Nuveen's chief investment officer.

"Many investors spooked by" the painful repricing of bonds over the past two years "sold their bond positions and piled their money into cash and cash equivalents," Nuveen CIO Saira Malik, wrote in a Monday client note.

Assets in money-market funds have ballooned to about $5.96 trillion over roughly the past year, even with a $1.4 billion decrease seen in the past week, according to data from the Investment Company Institute.

While there's plenty of debate about if cash on the sidelines will eventually migrate into the stock market, Malik thinks more investors should now consider adding duration in fixed-income portfolios.

The chart shows U.S. investment-grade corporate bonds still kicking off roughly 5% yields, high-yield, or "junk bonds," offering about 7.6% and leveraged loans are yielding around 9%.

Those levels are off the high set in October when the 10-year Treasury yield BX:TMUBMUSD10Y shot up to a 16-year peak of 5%, but has since retreated to about 4.1% as of Monday.

"Our outlook calls for the 10-year U.S. Treasury yield to fall from current levels to finish 2024 around 3.50%. Accordingly, we think extendingduration in fixed income portfolios could be wise," Malik wrote.

Malik expects the Fed to wait until the second half of 2024 for its first rate cut of this cycle, even though traders in fed-funds futures still have the odds of a 25 basis-point cut in March at about 45.8%, according to the CME FedWatch tool.

As soon as rate cuts begin, yields on money-market funds that have been around 5% can quickly retreat, making cash and cash-like investments less appealing to hold.

Investors wanting exposure to a broad basket of corporate bonds often invest in exchange-traded funds. The popular Shares iBoxx $ Investment Grade Corporate Bond ETF LQD was 9.8% higher in the past three months on Monday, while the iShares iBoxx $ High Yield Corporate Bond ETF HYG was up 7.2% for the same period, according to FactSet data.

Still, it doesn't look like a buy "everything" market in bonds, according to Malik, who sees "a slowing U.S. economy and cracks appearing in consumer resilience," as reasons for investors to be nimble and flexible.

Related: Borrowing frenzy sparked by Fed pivot party leaves out 'forgotten' companies that owe $500 billion

Stocks SPX DJIA were higher Monday afternoon in a busy week for corporate earnings, as well as a Fed decision on interest rates due Wednesday afternoon and a monthly jobs report set for Friday.

See: The busiest and most crucial week for fourth-quarter earnings is here. These 5 companies will do the heavy lifting.

-Joy Wiltermuth

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01-29-24 1428ET

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