As the US economy cools and central banks approach the end of their hiking cycles, CIO thinks it's time to lock durable income into portfolios. (ddp)

But we expect this to be fleeting. While Federal Reserve officials expect another 50 basis points of rate rises, an end is still in sight to Fed rate hikes. We advise investors to find more durable sources of income, including in longer-duration fixed income, equity markets, real assets, and structured investments.

Cash and money market funds have become more appealing recently.

  • The yield on the 3-month US Treasury recently climbed to the highest level in over 20 years at 5.4% due to more hawkish rhetoric from top Fed officials.
  • Even after a retreat to 5.32% as of 26 June, short-term rates are still more than 500 basis points higher than at the start of 2022.
  • While the Fed refrained from hiking rates at its June meeting, the dot plot now points to 50 basis point more tightening this year.

But we believe the attraction of cash is likely to prove short-lived, and investors should lock in durable income.

  • Despite the Fed's more hawkish signaling at its June meeting, the central bank still appears near the end of its rate hiking cycle.
  • Investors can take this opportunity to lock in attractive rates before markets start to price lower rates in the future.

We think it's time to add exposure to bonds.

  • The more defensive, higher-quality segments of fixed income look most appealing to us, given the all-in yields on offer and the potential for capital appreciation as investors shift their focus from inflation risks to growth risks.
  • Investors can also find attractive income opportunities in equity markets, through high-dividend and quality stocks.
  • Real assets along with yield-generating structured investments offer alternative ways to add durable returns.

Did you Know ?

  • The Federal Reserve kept rates on hold at its meeting on 14 June, but signaled that further rate increases would likely be needed, given the strength of the labor market and stubbornly high inflation.
  • While yields on 2- and 5-year US Treasuries are down from their recent peak in early March—prior to the emergence of worries over the health of the banking system—yields remain attractive, at 4.74% and 3.71%, respectively, as of 26 June.
  • The MSCI World High Dividend Yield index is offering a 3.9% yield. These equities are mostly in the more defensive parts of the markets and are relatively resilient when the economy slows—as we expect these dividend payments to be relatively stable, even in the event of a recession, based on historical experience.

Investment view

Earning more durable income is not just about high-quality bonds. Among the riskier parts of fixed income, we like emerging market credit. We see opportunities in diverse income strategies to balance fixed income exposure. This includes quality dividend-paying equities across traditional and sustainable strategies, US preferred securities, and in volatility-selling strategies.

Main contributors - Christopher Swann, Vincent Heaney, Matthew Carter

Content is a product of the Chief Investment Office (CIO).

Original report - Where can I find portfolio income?, 26 June 2023.