LIVE MARKETS-Fed rate cuts may require short-term bond investors to consider course correction

Welcome to the home for real-time coverage of markets brought to you by Reuters reporters. You can share your thoughts with us at markets.research@thomsonreuters.com

FED RATE CUTS MAY REQUIRE SHORT-TERM BOND INVESTORS TO CONSIDER COURSE CORRECTION

Money market funds and ultra-short-term fixed income investments captured significant investment capital over the past several years. This was especially true given uncertain political and economic seas.

"Investors added nearly $3 trillion to money market funds since early 2020, evidencing a high level of interest," writes Tony Miano, investment strategy analyst at the Wells Fargo Investment Institute (WFII), in a note.

Miano adds that "We believe that falling interest rates have and will continue to impact the attractiveness of ultra-short-term assets and that extending maturities slightly in fixed income holdings may be a better option."

It's perhaps no surprise that over the past several years investors navigated their way to money market funds given the yields that were available. Given the Fed's will to battle inflation in 2022 and 2023, investors saw yields in excess of 5% in ultra-short-term investments with relatively little risk.

However, Miano notes these yields have already declined significantly as the Fed moved to reduce rates, most recently at its December meeting.

WFII believes the Fed is poised to keep cutting rates, with two additional 25 basis point cuts in 2026. Therefore, Miano thinks investors should be repositioning their ultra-short-term and short-term investments before rates fall further.

"Our view is that an effective way to do this may be slightly extending duration (a measure of interest rate sensitivity) to longer maturity investments," Miano writes.

WFII is favorable on U.S. intermediate-term taxable fixed income in the three-to-seven-year maturity range, believing it to be a good mix of yields and risk while allowing investors to consider locking in yields through expected additional rate cuts.

(Terence Gabriel)

EARLIER ON LIVE MARKETS:

DECK THE HALLS WITH MORTGAGE DATA CLICK HERE

HEALTH TRENDS, WEIGHT-LOSS DRUGS TO FUEL PROTEIN MARKET BOOM, BARCLAYS SAYS CLICK HERE

S&P 500 HAS ANOTHER FLIRTATION WITH ITS 50-DMA CLICK HERE

EU'S CHRISTMAS GIFT TO THE AUTO SECTOR DISAPPOINTS CLICK HERE

OIL 'WIDOW MAKER' GETS A NUDGE FROM VENEZUELA CLICK HERE

EUROPEAN SHARES INCH UP, FTSE LEADS THE WAY CLICK HERE

EUROPE BEFORE THE BELL: FUTURES TICK HIGHER CLICK HERE

UK INFLATION FINAL HURDLE BEFORE BOE VERDICT CLICK HERE