As the Fed maintains its stance on higher interest rates, the short end of the fixed income yield curve has adjusted to reflect this likelihood. After a prolonged period of bond yields hovering between zero and one percent, we now have the opportunity to invest in high-quality bonds with short maturities that yield above five percent. If inflation falls, as we anticipate, these bonds will become more appealing in “real” terms. Yields on our cash liquidity program (CLP) have also increased; the CLP concluded the quarter at 4.75% and will continue to rise in step with the federal funds rate. We are also purchasing bonds across client portfolios to take advantage of higher rates.
It is worth noting that the yield curve remains inverted, indicating that investors are speculating on a potential interest rate cut by the Fed, possibly as early as early next year. From our perspective, “locking in” yields between 5-6% for high-quality bonds looks attractive. Given the overall strength of corporate balance sheets, credit risk for investment grade bonds is relatively low, and municipal issuers are generally in good financial standing given the fiscal spending from the Inflation Reduction and CHIPS & Science Acts. Even if the economy weakens further, we do not foresee significant credit or interest rate risk associated with short- and intermediate-term bonds.