Couple talking to financial advisor at home
Fg Trade | E+ | Getty Images
Consider when to increase bond duration
While it’s difficult to predict future interest rate cuts, Kyle Newell, a certified financial planner and owner of Newell Wealth Management in Orlando, Florida, said he has started shifting bond allocations.
When building a bond portfolio, advisors consider so-called duration, which measures a bond’s sensitivity to interest rate changes. Expressed in years, duration factors in the coupon, time to maturity and yield paid through the term.
As interest rates rose in 2022, many advisors opted for shorter-duration bonds to protect portfolios from interest rate risk. But allocations may shift, depending on future Fed policy.
“I don’t want to get too aggressive with increasing duration,” said Newell. “Because clients with bonds typically are more conservative, and it’s really about protecting principal.”
Look for ‘areas of opportunity’
As policy shifts, advisors are also looking for ways to optimize allocations amid continued economic uncertainty.
“There are still areas of opportunity in the bond market that are very attractive based on how poorly bonds performed last year,” such as corporate bonds trading at a discount, below “par,” or face value, said Ashton Lawrence, a CFP and director at Mariner Wealth Advisors in Greenville, South Carolina.
“We’re always looking to find a sale or discount,” Lawrence said, noting that high-quality discount bonds have built-in growth as long as the assets don’t default. “You’re capturing that appreciation while you’re getting paid along the way,” he said.
Of course, every investor has different needs, Lawrence said. “But there are definitely some areas of opportunity within the fixed income field.”