With the Federal Reserve rate-cutting cycle now underway, income investors may want to take a closer look at their portfolios. The central bank slashed the federal funds rate by a half-percentage point in September and fed funds futures prices suggest a 93% probability that rates will drop another 25 basis points in November, according to the CME FedWatch Tool . One basis point equals 0.
01%. Futures point to a 74% likelihood of another quarter point cut in November. In this environment, Vanguard likes higher-quality, fixed-income assets.
The money manager expects the economy to slow to below-trend growth but avoid recession, and anticipates the yield curve will revert to its typical upward-sloping angle. "Historically, when economic growth has slowed but stayed positive, higher-quality fixed income has done well. We're sticking to that playbook for now," Sara Devereux, global head of Vanguard's fixed income group, said in the firm's quarterly update on Wednesday.
Right now, she is approaching Treasurys more tactically over the near term. "Yields are reasonably priced for a backdrop in which the economy holds up and the expectation holds that the Fed will continue to cut rates," Devereux wrote. "We continue to look for attractive entry points to position our portfolios longer in duration, as we expect growth to slow into next year.
" Yields on the 10-year Treasury at 4.25% would provide an opportunity to add duration, she noted. The 10-year yield actually broke above 4.
25% on W.
