With Uncertainty Ahead, Intermediate Bonds Offer Opportunities

The question of whether the economy is in a recession or not, a forthcoming presidential election, and interest rates add to the high level of uncertainty in the current market. As such, fixed income investors may want to take a middle-ground approach with bonds and opt for debt with intermediate maturity dates.

With looming rate cuts ahead, it's not certain how aggressive the Federal Reserve will be. A growing economy could mean a slow and steady accommodative monetary policy if data shows that the economy is still running hot.

“If we do get stronger growth than is expected, there’s some risk in being too far out on the duration curve,” said Carol Schleif, chief investment officer of the BMO Family Office, via a Morningstar report. She noted that long-term economic expectations can impact long-term rates versus short-term.

“It’s the proverbial bullwhip effect,” Schleif added, recommending that investors stay in short-term debt to limit volatility and maintain high yields.

Investors can also opt for a balance between short- and long-term debt with intermediate bonds. Following the yield-curve's inversion in 2022, it's starting to normalize again, which could see a more pronounced move into intermediate bonds.

“As the curve steepens out, people are going to be moving into intermediate fixed income," said David Rogal, portfolio manager at BlackRock’s Fundamental Fixed Income Group.