Short-term interest rates have likely peaked, and we expect a gradual decline into year-end as the Fed brings the policy rate down to a range of 3-3.5% at a gradual pace. With inflation falling, “real” yields (net of inflation) remain positive, which is encouraging for savers. The current yield on our Cash Liquidity Program (CLP) is 5%, but this will also likely come down gradually over time. With inflation falling and bond yields dropping from a two-decade high, bond portfolios offer a nice cushion and should provide both income and capital preservation within a diversified portfolio. Credit risk is quite low, as financial conditions are strong and consumer and corporate indebtedness appears manageable.
Because short yields have been higher than long yields, investors are not incentivized to take maturity or duration (i.e. interest rate) risk in portfolios. For this reason, we have positioned our holdings in bonds that mature within five years, without sacrificing much yield (income). As mentioned above, we see some concern over longer term fiscal deficits that could weigh on longer-dated bonds. We are likely to continue moving cash positions into fixed rate bonds and equities as short-term rates fall but recommend holding some cash for anticipated needs over a six to nine month horizon.
