Targeting a 5% Return in a 3% World
With the federal funds rate dropping, many fixed income investors can expect to see their income begin to decline. But a change in the direction of the policy rate also creates an opportunity to reposition portfolios for increased returns.
Key takeaways
- With much of the U.S. yield curve near 4% and the federal funds rate expected to settle around 3%, how can investors continue to earn 5% in a world of 3% interest rates?
- Using history as a guide, we explore three scenarios—all of which suggest the yield curve will steepen as the overnight rate declines.
- Strategies that take interest rate risk up to the inflection point, at approximately the two-year maturity point on the yield curve, are likely to maximize return.
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