FOMC Update – A “Hawkish Pause” in September

Both the equity and bond markets experienced volatility, following the Fed’s perceived “hawkish pause” during the September FOMC meeting. While the Fed maintained its key interest rate for a second time due to easing inflation, it also signalled a potential rate hike later in the year.

However, in the longer-term outlook for 2024 and 2025, interest rates are anticipated to trend downwards. The dot plot, which visually displays the projections of Fed officials on interest rates, indicates a decrease in the policy rate from 5.6% in 2023 to 5.1% in 2024, with a further reduction to 3.9% by the close of 2025.

Fed’s dot plot indicates that policy rates to be lower in 2024 and 2025

Implications on Income+ Portfolios

Bond markets may experience short-term volatility as investors recalibrate for an additional rate hike by the year end. But here is a silver lining: the broader forecast shows a decline in interest rates over the next two years. And as these rates dial down, bonds are poised to benefit.

Historical returns reveal a striking 94% correlation between a bond’s starting yield and its 5-year annualised return. This suggests that the bond’s initial yield can be a potent indicator of its performance over the subsequent five years. As of the end of June 2023, the yield of high-quality core bonds is at 4.8%, marking the highest in the last 15 years. Given this trend, bonds are increasingly being recognized as a compelling option for investors looking to boost their passive income.

Syfe Income+ Strategy

The Syfe Income+ Portfolios invest into global bonds for steady, diversified income. Unique in its approach, it leverages PIMCO’s established fixed income strategies. We have introduced two portfolios: Income+ Preserve and Income+ Enhance. The Income+ Preserve is designed for investors aiming to generate consistent income above inflation or short-term money market rates while prioritising capital preservation. To achieve this, we’ve selected underlying funds concentrated on high-quality bonds like US Treasuries and investment-grade corporate bonds, then combined them to optimise returns. The Income+ Enhance is tailored for investors looking to generate high current income coupled with long-term capital appreciation. This strategy emphasises credit to yield higher returns, typically by investing in higher-yielding, lower-rated bonds such as high-yield corporate bonds and emerging market bonds.

The yield to maturity for Income+ Preserve is 6.7%, and for Income+ Enhance, it’s 8.2%, suggesting potential future long-term returns. By choosing Income+, you can achieve up to 60% savings in fund fees compared to retail DIY investing, as the strategies utilise the institutional share classes and pass on the rebates to investors.