Preparing your bond portfolio for the Fed’s next moves
Medium-term government and corporate bonds offer modest yield pickups, and are good options for income-focused investors to lock in yields with a decent balance between yield and duration exposure
THE US Federal Reserve is widely expected to resume cutting interest rates. At the time of writing, market pricing indicates a 90 per cent probability of a 25 basis point (bp) cut and a 10 per cent probability of a larger 50 bp cut in September, with nearly 75 bps in total cuts priced in for 2025.
At the Jackson Hole symposium in August, US Federal Reserve chairman Jerome Powell signalled greater openness to rate cuts, citing downside risks to the labour market. Since then, cracks in US employment have continued to emerge. Unemployment has edged higher, while non-farm payroll figures have seen large downward revisions. The latest downward revisions show that the US economy may have lost 13,000 jobs in June, its first monthly job loss since 2020.
Tough decision for the Fed
While the weakening employment picture supports a rate cut, inflation complicates the picture. Price pressures in the US remain persistent, with inflation showing signs of re-acceleration, partly driven by tariff pass-throughs, as well as non-tariff causes such as rising shelter costs.
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