Zinger Key Points
- Fed remains patient on rate cuts; investors should focus on managing bond volatility with a barbell strategy.
- WisdomTree’s Flanagan sees a steeper yield curve ahead, favoring short-duration bonds over longer-term maturities.
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With Jerome Powell keeping his cards close to the chest, investors hoping for a quick rate cut might need to sit tight.
Inflation has now regained equal footing with labor market data in the Fed's policy calculus, and according to Kevin Flanagan, Head of Fixed Income Strategy at WisdomTree Inc. WT, the latest numbers simply don't "rise to the threshold" for an early rate cut.
While the central bank would love to get back to neutral, Powell is in no rush.
"Powell & Co. will wait to see future employment and inflation reports to see if the window ‘re-opens' for another cut come the March FOMC meeting, at the earliest," Flanagan said in an exclusive interview with Benzinga.
Read Also: Trump Faces Bond Market Pressure As 10-Year Yields Near 5%, Challenging Economic Agenda
Investment Strategy: How To Navigate Market Uncertainty
Volatility in the bond market is here to stay, making traditional fixed-income strategies look increasingly shaky.
Flanagan warns that duration risk can amplify price swings, leaving investors exposed if they're too far out on the yield curve. His advice? A barbell approach that blends short-duration and long-duration assets to navigate the turbulence. "Utilizing a barbell strategy with an active-passive approach is our recommendation," Flanagan states.
WisdomTree's own in-house strategy pairs:
- a Treasury floating rate fund – such as the WisdomTree Floating Rate Treasury Fund USFR
- with a yield enhanced U.S. aggregate bond fund (such as the WisdomTree Yield Enhanced U.S. Aggregate Bond Fund AGGY or the WisdomTree Bianco Total Return Fund (the WisdomTree Bianco Total Return Fund WTBN —offering investors a way to counterbalance risk with liquidity and yield.
Where's The Yield Curve Headed?
Looking ahead, the Treasury yield curve is likely to steepen further over the next six to twelve months, with intermediate to long-term bonds expected to underperform their short-term counterparts.
"The Treasury yield curve will more than likely continue to steepen over the course of the next 6-12 months," Flanagan notes. Managing both volatility and duration will be key, and investors need to be tactical to avoid getting caught on the wrong side of the rate cycle.
With the Fed playing the waiting game and bond market uncertainty persisting, investors would do well to adapt. Staying nimble and strategic might be the only way to win in this new fixed-income reality.
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