What are your best portfolio moves as rates begin to fall?

The yield curve is constructed daily with bonds that have BVAL prices at the market close. The BVAL curve is populated with USD-denominated senior unsecured fixed rate bonds issued by investment grade U.S. companies. Taxable equivalent yield (TEY) assumes a federal tax rate of 37.0%, a Medicare surcharge on investment income of 3.8% and no state tax. 

For the short term: Ultra-short investment grade (IG) credit—For the first step out of cash, consider an allocation to ultra-short funds—duration of less than one year—to secure today’s attractive rates longer, help reduce reinvestment risk and enhance your cash flow’s predictability. IG ultra-short credit portfolios offer robust credit quality, strong liquidity and broad diversification, as the bonds are sourced from a wide array of issuers. They let you move beyond the comfort of cash, generate more income and maintain a conservative risk profile.

At a medium-term maturity: Securitized assets—Consider asset-backed securities, agency mortgage-backed securities (MBS) and commercial MBS. We may consider accessing them through an active, diversified investment vehicle. We also think current market conditions may present an attractive entry point for high-quality corporate bonds.

For the long term: Municipal bonds—We like municipal bond yields, and their current relatively attractive pricing, mainly due to record muni bonds issuance.¹ The three main forces behind this year’s muni supply surge: increased federal infrastructure spending, rising labor and material costs, and deferred projects. Record supply has pushed prices down (and yields up), which can create a timely entry point to lock in higher yields on high quality muni bonds.

A review of your objectives and liquidity needs can help you better size your excess cash, and put it to work smarter to meet your goals.

B—Build your core portfolio

The core is your portfolio’s central group of diversified investments designed to provide stability and consistent long-term growth, serving as the foundation of your overall investment strategy. The core is your portfolios center, powering your ability to achieve your essential goals. Your core fixed income helps provide ballast through income and duration, which may offset losses elsewhere in the portfolio. Your core provides diversification in a recessionary environment, as bonds historically move opposite equities, and that’s useful in a changing environment. As noted, we favor intermediate and long-dated munis, which currently offer unusually attractive yields and attractive tax-equivalent spreads relative to Treasuries. 

In core bonds, credit quality comes first. A high-quality investment grade credit allocation helps manage risk, maintain portfolio resilience and lock in consistent income. Munis tend to be less reactive than Treasuries during periods of market volatility, but note: A sell-off in long munis could drive losses in a longer-duration portfolio. Additionally, regularly reviewing your core bond holdings ensures that your portfolio remains well positioned to navigate changing market conditions, and continues to meet your income and risk management objectives.

While many investors looking for professional guidance prefer active management, we do see some investors choosing a buy-and-maintain ladder strategy for core munis.

C—Complement your strategy

Once you adjust your cash and core buckets, you can explore complementary opportunities. Your goal here may be to enhance income, improve tax efficiency or generate excess returns (a.k.a. “alpha” above the market’s average).

Complementary investments we favor now include hybrids, which encompass hybrid debt and preferred stock—securities that share characteristics of both debt and equity. Hybrids offer relatively high starting yields, and have historically experienced lower loss rates during periods of market stress.

Hybrid debt provides exposure to core sectors such as utilities, insurance and telecom—sectors that are currently benefiting from strong balance sheets and favorable regulatory trends.

On the risk side, unlike traditional bonds, hybrids are lower in the capital structure, meaning investors are repaid after senior debt holders in the unlikely event of a default. However, by investing in quality companies lower in the capital structure, you may capture enhanced yields compared to senior debt, and could be rewarded for taking on this additional risk.

Preferred stock offers a tax-efficient investment option, as income from preferreds is typically taxed at the long-term capital gains rate rather than the higher ordinary income rate. Over extended periods, preferred securities have historically delivered better after-tax returns than high yield bonds, making them attractive for both income generation and portfolio diversification.

In the current environment, we favor active management for your core complement. An active bond portfolio manager can make defensive moves to mitigate growing risk. Enhancing returns in a specialized asset class may require the added thought that professional management brings.

We can help

Fixed income assets are a vital component of any portfolio, and thoughtful asset allocation can help support driving long-term returns. There’s no one-size-fits-all approach—your strategy should reflect your unique goals and circumstances. Your J.P. Morgan team is here to partner with you, review your plan, and help design a fixed income strategy that supports and enhances your overall investment objectives.