Rate cuts are coming: What it means for your bond portfolio

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Rate cuts are coming: What it means for your bond portfolio

Inflation and monetary policy have been two of the hottest topics in the past couple of years, putting smiles on the faces of savers and causing some concern for borrowers. After raising policy rates to roughly 5% over the past number of months in a bid to quell inflation, both the Bank of Canada (BoC) and the U.S. Federal Reserve (Fed) appear poised to commence with rate cuts at some point in 2024, marking a shift in monetary conditions back towards an accommodative posture.

As a result, we believe that ample opportunities remain for bond investors in the coming months, especially once North American central banks begin to cut policy rates and the yield curve steepens further. In the sections below, we suggest ways in which investors can position their bond portfolios to benefit from this market context, such as purchasing government bonds with longer maturities and shorter-term high-quality corporate bonds, which provide the potential for higher income and price appreciation. Before we explore these opportunities, however, we believe it is instructive to provide a synopsis of the typical impact monetary policy exerts throughout the business cycle so we can obtain a better understanding of the path forward for North American central banks. We will then examine the current state of monetary policy and consider the implications for fixed income investors, particularly in the context of a steepening bond yield curve.