As the U.S. gears up for Election Day, market uncertainty is at an all-time high. However, fixed income investors are not backing down and are on the lookout for lucrative opportunities amidst the chaos. The latest data shows the S&P 500 experiencing small losses, with the 10-year Treasury yield holding steady at around 4.3%. Political polls reveal a tight race between Vice President Kamala Harris and former President Donald Trump, making investors anxious about the potential outcomes for tax, trade policy, and spending plans based on the congressional makeup post-election.
Andrew Szczurowski, portfolio manager for the Eaton Vance Strategic Income Fund, emphasizes the importance of Congress’ composition for the bond market, predicting higher deficits under a clean sweep by either party. Additionally, the Federal Reserve’s pending decision on interest rates after its two-day policy meeting adds another layer of complexity to the investing landscape. With a 98% likelihood of a 25 basis point cut, investors are bracing themselves for potential market turbulence.
Despite the uncertainty, fixed income expert Anders Persson from Nuveen remains optimistic about the bond market’s income-generating potential, especially in municipal bonds. Unlike corporate bonds, municipal bonds offer tax-free interest income on both federal and state levels, making them an attractive option for high-income investors looking to minimize tax liabilities. With tax cuts set to expire in 2025, municipal bonds could provide a stable addition to investors’ portfolios.
Persson’s team is keeping an eye on duration and credit risk, favoring three to seven-year taxable securities and high-quality high-yield bonds. Additionally, they are exploring opportunities in agency mortgage-backed securities, which have emerged as cheap buys leading up to the election.
Investors looking to diversify their fixed income holdings can consider exchange-traded funds (ETFs) like the iShares National Muni Bond ETF (MUB) and the SPDR Portfolio Mortgage Backed Bond ETF (SPMB) for exposure to municipal and mortgage-backed securities, respectively. For a more simplified approach, core bond funds like the Fidelity Intermediate Bond Fund and the Baird Aggregate Bond Fund offer a broad range of fixed income instruments with an intermediate duration.
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