After the Federal Reserve interest break on Wednesday, a fixed-income expert looks at what you should know about bond allocations amid economic uncertainty.
“This is an attractive time to start looking at investment-grade loans,” which can provide “good income,” said Sonal Desai, executive vice president and chief investment officer at Franklin Templeton Fixed Income.
“It’s been a decade and a half that people like your mother or my father, frankly, have had no income from their fixed income,” Desai told CNBC. Summit of financial advisors. “They took the volatility and it didn’t generate any income.”
Experts are considering a longer bond duration
It’s also time to consider adding bond durations, she said, from “very short” to “somewhat longer.”
As interest rates change, advisers consider duration, which measures a bond’s sensitivity to changes in interest rates. Factors in coupon duration, time to maturity, and yield paid over the period.
Many advisors have switched to bonds with a shorter duration protect portfolios from interest rate risk. But allocations may shift to longer-dated bonds as Fed policy changes.
Consider high yield bonds
Investors with a greater appetite for risk may also consider high yield bondssaid Desai, which typically pay a larger coupon but have a higher risk of default.
“If you can take the volatility over the next 18 months or so, the high yield offers 8.5%, sometimes close to 9%,” she said.
While these assets are riskier amid economic uncertainty, Desai believes a potential US recession could be “quite mild.”
“The default is probably going to go up, and that’s why you’re not buying the index,” she said. But investors can lock in “pretty interesting returns” by picking individual corporate bonds.