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High interest rates on short-term government debt will fall as the Fed cuts rates.
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JPMorgan notes that the three-month rate will fall from 5.4% to 3.5% over the next 18 months.
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Investors should reposition their investments into long-term bonds and large-capitalization equities, the bank advises.
High yields in the era of tighter Fed policy have made short-term government debt a popular choice, but investors can no longer rely on the “T-bill and chill” strategy, JPMorgan said.
Treasury bonds — which mature in a few weeks to a year — have become a popular investment for passive investors hoping to profit from high interest rates. Because Treasuries are sensitive to tighter monetary policy, yields have risen above 5% since 2022.
But with rate cuts looming in September, investors should brace for a drop in yields, JPMorgan wrote. The bank expects the three-month rate to fall to 3.5% from 5.4% over the next 18 months.
This decline could be even sharper if the economy slows more than expected, the analysts said.
Still, parking money in short-term debt can be a tough habit for investors to break. According to Bloomberg, money market funds that invest in short-term debt received $106 billion in August alone, bringing total assets to a record high of $6.24 trillion.
Still, JPMorgan is advising investors to reposition themselves.
T-bills have historically underperformed long-term bonds when interest rates fall, and traders may miss out on other opportunities by investing in liquid assets such as short-term government bonds.
“In fixed income, investors have not missed their chance to capture attractive returns, with core bond yields still at 4.4%, but the window is closing fast,” analysts wrote. “As this summer has shown, what is here today can quickly be gone tomorrow: 2-year yields fell by 85 bps in less than two months.”
JPMorgan’s advice on rebalancing investments is based on the direction the economy is moving. Investors should determine why the Fed is cutting rates before pursuing a new strategy.
When the Fed eases policy in a recession, investors should focus on U.S. large-cap and growth stocks. International stocks, as well as value and small-cap stocks, tend to suffer the most, JPMorgan said.
For fixed income, investment grade bonds should be the main focus. Long maturities tend to outperform, while high yield bonds can result in negative returns.
When the Fed eases policy alongside a soft landing — achieving low inflation without triggering a major downturn — large-cap returns typically double those of small-caps. Meanwhile, U.S. growth and value stocks perform similarly, while risk assets and high yield bonds can lead to positive returns.
Read the original article on Business Insider
