There is a lot of uncertainty in the markets these days, but for fixed-income investors who remain agile, there could also be several opportunities, according to Wells Fargo. Bond yields remain elevated as investors grapple with uncertainty around the direction of interest rates and inflation . The yield on the 10-year Treasury is currently around 4.47%. Yields move inversely to prices. After cutting last year, the Federal Reserve opted to leave rates unchanged in January. The majority of market participants don’t think the central bank will lower again for several months, according to the CME FedWatch Tool . On Wednesday, Federal Reserve Chair Jerome Powell testified before Congress that ” we’re not quite there yet ” in reducing inflation to its 2% target. To take advantage of the opportunities arising amid the uncertainty, Wells Fargo suggests remaining active and implementing defensive and growth-oriented fixed-income strategies concurrently. “Ultra-short-term securities may appear attractive, but those opportunities diminish if the Fed eventually cuts policy rates further, while longer-term securities can be exposed to interest-rate risk if inflation and hotter economic growth force the Fed to raise rates further,” global fixed income specialist Luis Alvarado wrote in a note Monday. Here are six key opportunities, according to Alvarado. U.S. intermediate-term taxable bonds These bonds, which have maturities of three to seven years, strike a balance between yield and price volatility, Alvarado said. They currently have attractive yields and, historically, tend to be less rate sensitive, which is important if rates increase, he noted. “This asset class may provide investors with opportunities to outperform cash, cash alternatives, and U.S. Short Term Taxable Fixed Income in the near term,” he wrote. U.S. long-term taxable bonds Alvarado favors bonds that have a 10-year or more time horizon over short-term bonds, although he has a neutral rating on them. “Consider targeting long-term bonds and being favorable duration (a measure of interest rate sensitivity) in an effort to take advantage of yield steepness on the long end of the curve now that the Fed appears to be on pause in its interest rate-cutting cycle,” he said. Investment-grade corporate bonds Credit spreads are tight, meaning they are expensive, but the higher yields relative to other investment-grade fixed-income sectors make them a favorable investment, Alvarado said. He advises investors to do a sound credit analysis before buying the assets. The focus should be on selectivity among issuers and sectors and pay close attention to liquidity and high quality, he added. Select securitized products Residential mortgage-backed securities and asset-backed securities both offer value relative to other fixed-income investments, while providing favorable credit quality and liquidity, Alvarado said. “Furthermore, we believe an advantage of RMBS over IG [investment-grade] corporates remains visible in credit-spread differential,” he said. “Demand for ABS remains particularly strong, and although credit spreads have compressed in the past few months, we believe they have room to tighten further.” Emerging market fixed income Both U.S.-dollar and local currency emerging-market sovereign bonds should continue to have positive performance in the near term, but most of that support should come on the back of additional Fed rate cuts, Alvarado said. “Still, the attractive yield differential of EM bonds may provide greater currency resilience and a cushion against capital losses if interest rates climb once again, or if credit spreads widen,” he said. Municipal bonds Fundamentals remain attractive in municipal bonds , Alvarado said. While there may be attractive yield opportunities in other fixed-income sectors, munis still have an important role in the portfolio for high-income investors, he said. The bonds are free of federal tax and are exempt from state tax if the investor resides in the bond’s issuing state.
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