A July CPI report showed inflation has dropped to 2.9% (the lowest level since March 2021). This update, coupled with recent softening in the labor market, has all but guaranteed the Fed will lower rates in September. The question now shifts from when the Fed will begin to cut to whether they will cut it by 0.25% or 0.50% at the upcoming Fed meeting.

Historically, bonds, particularly longer maturity bonds, have shown resilience and even strong performance following the Federal Reserve’s decision to cut interest rates. This is because longer-duration bonds, such as U.S. Core Bonds, tend to benefit most in a declining interest rate environment. When rates fall, the prices of these bonds typically rise, resulting in capital gains in addition to the interest income. This dual benefit makes them particularly attractive in times when the Federal Reserve signals a shift from tightening to easing monetary policy.

The chart below highlights average returns over a 12-month period following the first Federal Reserve rate cut from January 1, 1989, to July 31, 2024. The data clearly demonstrates that U.S. Core Bonds have consistently outperformed other fixed-income assets, yielding an impressive average return of 7.2%. These longer-term bonds have outperformed their shorter maturity equivalents and money market funds during these periods, both seeing average returns of 4.2%. High-yield bonds have seen mixed results as they are more dependent on the outlook for credit as opposed to interest rates.

Where appropriate, we have already positioned client portfolios with a bias toward longer maturity bonds in anticipation that the Fed would begin lowering interest rates. We are continuing to ensure ample liquidity is available in client portfolios and we anticipate remaining fully allocated towards fixed income targets for the foreseeable future.

By Ryan Zywotko, CFA, CMT

Director of Investments

CAISSA Wealth Strategies