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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, Fla., said he has begun to realign his bond allocation.
When building a bond portfolio, advisers take into account so-called duration, which measures a bond’s sensitivity to changes in interest rates. Expressed in years, duration factors in the coupon, time to maturity and yield paid over the term.
As interest rates edged higher in 2022, many advisors chose shorter-duration bonds to protect portfolios from interest rate risk. But the allocation could change depending on the Fed’s future policy.
“I don’t want to get too aggressive with increasing the duration,” Newell said. “Because bond clients tend to be more conservative and it’s really about protecting the principal.”
Look for “opportunity zones”
As policies change, 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, CFP and principal at Mariner Wealth Advisors in Greenville, South Carolina.
“We’re always looking to find a sale or a discount,” Lawrence said, noting that high-quality, discount bonds have built-in growth as long as the assets don’t default. “You capture that appreciation as you get paid along the way,” he said.
Of course, every investor has different needs, Lawrence said. “But there are definitely some areas of opportunity in fixed income.”