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Fixing Your Fixed-Income Portfolio

After a brutal 2022, the outlook for fixed-income investments is much improved for 2023.

With that in mind, Nellie Huang, Kiplinger’s Personal Finance, offers a plan of action for your fixed-income portfolio in what promises to be a new bond market

Cash – At long last, cash offers a decent yield – in some cases, 3% to 4%, a level not seen in 15 years. You must look in the right places to find it, though, says Greg McBride,’s chief financial analyst. Some banks have been “stingy” about raising their payouts, McBride says. But online banks, community banks and credit unions have been “trying to outdo each other” on payouts for short-term CDs and savings accounts, he says.

Treasuries – Yields are high, and you can lock in attractive yields not seen in years. But should you lock in short-term rates, which are higher than long-term rates? Or should you grab long-term rates now, before a recession comes along and prompts the Fed to cut rates?

One strategy: Build a ladder of Treasury notes with maturities between one and 10 years, reinvesting the money from maturing one-year securities into new 10-year notes.

“There’s less risk of getting it wrong, because you buy and hold,” says Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research. “If rates go up, you get more income, because you’re rolling up to higher yields. And if rates go down, you’ve already locked in higher yields.”

Agency Mortgage-Backed Securities – They’re triple-A-rated, government-backed and offer diversification from Treasury bonds. Plus, rates would have to fall a lot for most homeowners to refinance, so prepayment risk – the chance of an early loan payoff when homeowners refinance or sell – is low. MBS prices are low, too, after a sell-off last year, says Jake Schurmeier, a manager with Harbor Capital’s multi-asset solutions team.

Treasury Inflation-Protected Securities – These government bonds move in step with the rate of inflation and pay a guaranteed rate of return on top. But many strategists are neutral on TIPS, partly because of uncertainty about where inflation will settle and the direction of interest rates.

“TIPS will give you protection from inflation, but not against rising rates,” says Warren Pierson, co-chief investment officer at Baird.

Although most analysts expect consumer prices for goods and services to fall overall, inflation may settle for a time at a higher level than some people expect. “Inflation is not dead, so maintain some TIPS exposure,” says John Lovito, co-chief investment officer of global fixed income at American Century Investments.

Municipal Bonds – Muni bonds, which generate income that’s exempt from federal taxes, tend to outperform corporate debt before, during and after a recession. They boast better credit ratings than corporate bonds, on average, and lower default rates, too, says Luis Alvarado, an investment strategy analyst at Wells Fargo Investment Institute. What’s more, he adds, current muni yields are among the “best we’ve ever seen.”

Corporate Debt – Stick with investment-grade (rated triple-A to triple-B) corporate debt. With a recession on the horizon, “we want to be more cautious of some of those riskier parts of the markets,” says iShares investment strategist Gargi Chaudhuri. A recession might dent corporate fortunes a bit, she adds, but at current yields, you’re getting adequately compensated for the credit risk you’re taking.

Editor’s Note: Nellie S. Huang is senior associate editor at Kiplinger’s Personal Finance magazine,

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