Traders’ hopes for a rate cut in June have been dashed, but income-seeking investors may find a great opportunity to scoop up bonds and dividend-paying stocks on the cheap. Consumer prices rose faster than expected in March, rising 3.5 percent year-on-year and beating Wall Street expectations. The report sparked a wave of selling on Wednesday, with the Dow Jones Industrial Average falling more than 400 points, as well as a sudden jump in bond yields after 10-year Treasuries topped 4.5%. Traders also brought their rate cut forecasts back down to Earth: Data on Fed funds futures trading now suggests a roughly 70% chance the Federal Reserve will ease policy in September, according to the CME FedWatch Tool. But not all news is bad, especially if you’re an investor with a long-term approach. “If you look at it objectively, the yield is still attractive for retail investors,” said Michael Carbone, a certified financial planner and financial adviser at Eppolito Financial Strategies in Chelmsford, Massachusetts. “I think it gives people another opportunity.” Fix-Income Bond Renewal The Fed’s higher interest rate environment has made certificates of deposit and money market funds very attractive to investors. Consider that the Crane 100 Money Fund Index has an annualized running 7-day return of 5.13% as of April 10. The prospect of a rate cut being pushed into the future buys investors more time to add duration to their bond portfolios. Duration is a measure of the sensitivity of a bond’s price to changes in interest rates, and bonds with longer maturities tend to have longer durations. “If you’re loaded on the short end of the curve, it’s still profitable to extend some maturities,” Carbone said. “You don’t have to go out for 30 years, but I would say it’s smart to extend maturities in general, even five to seven years.” Intermediate-term bonds—that is. those with maturities of four to 10 years — offer investors the best of both worlds, allowing them to reduce reinvestment risk by locking in longer-term returns. At the same time, these issues aren’t subject to the same wild price swings you’re likely to see with longer-dated bonds because interest rates fluctuate. “As the Fed’s next move will be to cut interest rates later this year, we think it is time for investors to get out into the duration to middle portion of the yield curve, specifically the 3-7 year portions,” it said BlackRock’s head of iShares Investment Strategy, Americas Gargi Chaudhuri on Wednesday. She highlighted the iShares 3-7 Treasury Bond ETF ( IEI ) and the BlackRock Flexible Income ETF ( BINC ) as investors begin to exit their cash allocations and diversify their fixed income arms. IEI has a 30-day SEC yield of 4.26% and carries an expense ratio of 0.15%. BINC, which is actively managed, has a 30-day SEC yield of 5.6% and a net expense ratio of 0.4%. “It makes sense to lock in some gains with certainty rather than risk what might happen in the next year or two,” said Colin Martin, fixed income strategist at the Schwab Center for Financial Research. “We like investment-grade corporate bonds—a great way to lock in yield.” Investors can use ETFs to address this space: Vanguard’s Intermediate-Term Corporate Bond ETF (VCIT) has a 30-day SEC yield of 5.33 %. There’s also the iShares 5-10 Years Investment Grade Corporate Bond ETF (IGIB), offering a 30-day SEC yield of 5.4%. Both funds have an expense ratio of 0.04%. Chasing Dividend Payers Higher interest rates have overshadowed opportunities among dividend-paying stocks, which look less attractive to income investors who can easily find risk-free yield. “Dividends are critical in a world of higher interest rates and higher inflation because the only way you can keep up with the higher cost of living is if your cash flows grow above that,” said Michael Klarfeld, portfolio manager at ClearBridge Investments, on CNBC’s “Power Lunch” on Wednesday. “You can find high-quality dividend producers that are growing dividends at 8, 9, 10% a year, and that’s well ahead of inflation.” He emphasized that consumer staples, utilities and energy have the best options for people, who seek dividends.
