As the dust settles post-election, the bond market is buzzing with new opportunities and challenges. With a recent Fed rate cut and shifting political dynamics, bond yields are fluctuating, leaving investors wondering if they’ll ever see that elusive 5% again.

In this issue, we break down the latest trends, explore strategies like dollar-cost averaging, and reveal where savvy investors can find higher yields—even as market volatility keeps us on our toes.

Today’s episode - Dynamic

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📈Navigating Fixed-Income Investments: Post-Election Bond Markets and Strategies for Savvy Investors

The conclusion of the recent U.S. presidential election brought mixed reactions across various sectors of the economy, and the bond market was no exception. Along with the election results, a 25-basis-point rate cut by the Federal Reserve was enacted, a decision that had been widely anticipated by market participants.

Despite the excitement surrounding political change and the Fed’s actions, many investors, especially those nearing or in retirement, are left pondering whether it’s worth waiting for bond yields to reach the elusive 5% mark again. Here’s a closer look at the current landscape of the bond market, the impact of the election on economic policies, and investment strategies to navigate the uncertainty.

Bond Market Post-Election: A Fluctuating Landscape

In the immediate aftermath of the election, bond yields experienced a notable increase, with longer-dated bonds seeing a 16-basis-point surge. However, this brief spike was followed by a retreat, with yields returning to lower levels by the end of the week. This fluctuation highlights the volatile nature of bond yields, which can shift on a daily basis in response to market sentiment, economic data, and geopolitical events. Investors who are holding out for a specific yield target, such as the sought-after 5%, may face considerable uncertainty as the market adjusts to new information and policies.

The uncertainty surrounding future economic policies under the new administration only adds to the challenge of predicting bond market movements. A potential Trump presidency, for example, has led to discussions about policies such as increased tariffs, tax cuts, and higher deficit spending, which could create inflationary pressures. These policies, some argue, might result in higher rates for a longer period. However, it’s important to recognize that these effects take time to materialize, often over several years. Economic policy, regardless of the administration in power, tends to evolve gradually. For investors nearing retirement, this long-term timeframe may not align with their financial goals.

Timing the Bond Market: A Risky Proposition

The age-old debate about timing the market applies just as much to bonds as it does to equities. Bond yields, like stock prices, can experience short-term volatility, but trying to time these fluctuations is often an exercise in futility. In fact, the bond market’s movements are unpredictable in the short term, as evidenced by the swift rebound in yields following the initial post-election spike.

While bond yields are currently higher than they were over much of the past decade, they are still far from the 5% yields that some investors are hoping for. For instance, the 10-year Treasury note was recently auctioned at a high yield of 4.34%, while the 30-year Treasury note yielded 4.68%. Investors hoping for 5% returns or higher may need to reconsider their expectations and explore other investment options that offer potentially higher returns.

Dollar-Cost Averaging: A Strategic Approach for Retirees

For those nearing or already in retirement, the volatility in the bond market presents a challenge. Rather than attempting to time the market for a specific yield, retirees may benefit from a more consistent approach: dollar-cost averaging (DCA). This strategy involves investing a fixed amount regularly, regardless of market conditions. By spreading out investments over time, DCA reduces the impact of short-term fluctuations and mitigates the risk of making large, poorly-timed investments.

Dollar-cost averaging is particularly effective in managing risk for those approaching retirement, as it ensures that an investor is not overly exposed to market fluctuations at a time when preserving capital becomes increasingly important. Even though bond yields are lower than they were in previous years, they are still significantly higher than the yields seen in much of the last decade. For example, despite a recent dip, investors are still seeing higher returns than they would have in the ultra-low interest rate environment of the past ten years.

Exploring Higher-Yield Bonds: A Shift Toward Corporate and Agency Bondsdscape

For those seeking higher yields, it may be time to consider moving up the risk spectrum. U.S. Treasury bonds, while generally considered low-risk, may not provide the 5% yields that some investors are hoping for. Instead, investors could explore agency and corporate bonds, which typically offer higher yields but come with added risks.

Currently, one of the highest-yielding agency bonds is from the Federal Home Loan Bank (FHLB), which offers a yield of 5.77%, with a first-call date in February 2025. For investors interested in corporate bonds, Deutsche Bank is offering a new bond with a yield of 6.10%, with a first-call date in November 2025. These higher-yielding bonds may appeal to investors looking for returns that exceed those of U.S. Treasuries, but it’s important to carefully evaluate the risks involved with these securities.

Treasury Yield Trends: A Mixed Bag

This week, Treasury yields exhibited a mixed performance across different maturities. Short-term bonds, such as the 1-month and 2-month Treasury bills, experienced a decrease in yields, reflecting the Federal Reserve’s recent rate cut. Conversely, longer-term bonds with maturities of five years and above saw yields fluctuate after an initial post-election spike. The bond market’s reactions to the election outcome and the subsequent economic policy uncertainty led to this volatility.

In general, shorter-term bond yields remain lower than they were at the start of the year, while longer-term yields have risen. The difference between short-term and long-term bond yields, known as the yield curve, has not steepened significantly, but there have been slight movements. The gap between the 1-month and the 30-year Treasury bonds has widened slightly to 23 basis points, up from 18 basis points the previous week. This trend still pales in comparison to the 147-basis-point difference observed at the start of the year.

Looking Ahead: Treasury Auctions and Opportunities

As for upcoming Treasury auctions, the schedule is relatively quiet in the near term, with the bond market closed on Monday for Veterans Day. For those seeking opportunities to invest in higher-yielding bonds, the market offers some attractive options in new-issue agency and corporate bonds. As previously mentioned, the Federal Home Loan Bank and Deutsche Bank are both offering bonds with yields that stand out in today’s market.

For those considering brokered CDs, there are still some options with reasonable yields. For instance, Jonesboro State Bank is offering a brokered CD with a yield of 4.6%, with a first-call date in February 2025. While this yield may not be as high as some of the more speculative investments, it offers a relatively stable income stream with a low risk profile.

A Long-Term View

As the bond market continues to evolve post-election, investors should remain mindful of the long-term nature of economic policy changes and the inherent volatility in bond yields. Trying to time the market for specific yield targets may lead to missed opportunities or risky decisions. Instead, strategies such as dollar-cost averaging, exploring higher-yield bonds, and diversifying across different types of fixed-income securities can help mitigate risks while still offering attractive returns.

For those looking to enhance their understanding of bond investing, educational resources such as the 2024 Bond courses or live Q&A sessions offer valuable insights into navigating the complexities of fixed-income markets. By staying informed and adopting a strategic, long-term approach, investors can better position themselves to meet their financial goals, regardless of the market’s short-term fluctuations.

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