Strategic Shifts: Optimizing fixed income allocations as the Fed’s hiking cycle ends

In response to high inflation, the US Federal Reserve has raised the fed funds rate 11 times since March 2022, reaching a range of 5.25%-5.50%. This has made short-term investments like cash and money market funds more attractive.

As the rate hikes have peaked, investors are reassessing their fixed income allocations. Historically, at the end of Fed hiking cycles, fixed income categories—such as ultrashort, short-term, and intermediate core bonds—have underperformed cash in the year before the hikes ended but subsequently outperformed in the following two years.

Recent performance aligns with past trends, indicating a potential shift as the Fed begins to cut rates, possibly at a moderate pace. Thus, it may be an opportune moment for investors to consider fixed income strategies that have historically provided better returns compared to cash following a shift in Fed policy.

The recommended categories include ultrashort bonds for near-term cash needs, short-term bonds for investors seeking slightly longer durations, and core bonds for those wanting a diversified fixed income portfolio akin to the Bloomberg Aggregate Index.