| Last month, the Fed cut its benchmark rate by a quarter-point - the first reduction of the year. For income investors, that's a big deal. Rate cuts often send bond yields down and prices up. But not all bonds behave the same. Some shine in easing cycles; others lag. With more Fed cuts expected, it's worth looking back at history to see where the best opportunities may lie. Think about the last three major easing cycles, beginning in 2001, 2008, and 2020. Each came in the face of crisis, and each sparked a rush into high-quality bonds. In 2001, as the dot-com bubble burst, the Fed slashed rates 11 times. Intermediate Treasurys returned more than 7%, and high-grade corporates did even better, posting 9% to 10%. Junk bonds, by contrast, flopped. Those with B ratings gained just 3%, while the lowest tier lost money. Investors were worried about defaults, and for good reason. Credit conditions were shaky, and balance sheets were stretched thin. In uncertain times, safety pays. When the financial system cracked in 2008, Treasurys were the only safe harbor. Long-term Treasurys soared nearly 30%, while short- and intermediate-term Treasurys gained about 5%. Everything else sank. High-yield bonds crashed 26%, investment-grade corporate bonds tumbled, and even munis slipped into the red. The panic was so intense that even strong issuers couldn't escape the sell-off. Of course, the 2020 pandemic shock was different. It wasn't based on underlying economic fundamentals. Even so, markets buckled and the Fed stepped in with massive monetary support. Unlike in 2008, the Fed's actions restored confidence quickly, proving how powerful policy support can be in keeping credit markets open. In fact, by year-end, almost every bond sector was positive. Investment-grade bonds returned 7.5%, munis gained 5% to 6%, and long Treasurys surged 17% or more. High-yield bonds rebounded too, but only to mid-single-digit gains. Again and again, this pattern reflects a broad truth - one that the longer-term data makes even more obvious. Allianz Global Investors analyzed every rate-cut cycle since the 1980s. The takeaway is clear: Treasurys delivered positive returns in almost every cycle. High-yield was far more uneven. It did okay during "insurance cycles" when the Fed eased without the threat of a recession, but lagged badly during cycles that preceded recessions. Across all nine rate-cut cycles studied, Treasurys gained about 12.5%. Investment-grade corporates weren't far behind at 11%. But high-yield? Only 4% on average. In cycles that preceded recessions, the gap widened. Treasurys returned nearly 15%, while high-yield barely broke even. The only time junk shined was during the insurance cycles - those rare "soft landings" where the Fed eased preemptively. In those cycles, equities and high-yield bonds staged big rallies, but that's the exception, not the rule. So what does this mean today? Check my full issue of The Oxford Income Letter to get my complete take. It will hit inboxes on October 14. If you're not currently subscribed and would like to learn more about my flagship newsletter which focuses on generating more income, go here. Marc | 
Post a Comment
Post a Comment