Fed Cuts Rates for the First Time in Four Years: What It Means for Investors

The Federal Reserve has lowered interest rates for the first time in four years.

On Wednesday, after the Federal Open Market Committee reduced rates to ensure a soft landing for the U.S. economy, a key measure of perceived risk in the U.S. corporate bond market slightly decreased. The Markit CDX North America Investment Grade Index, which tracks credit risk, tightened by over one basis point, reaching its lowest level in two months and its narrowest point since the pandemic began.

After Fed Chair Jerome Powell announced that large-scale rate cuts would continue, the market adjusted quickly, reducing most of its earlier gains.

When the interest rates drop, investors are encouraged to buy corporate bonds to lock in yields before they fall further. However, this could also lead to more companies issuing bonds, potentially lowering bond values as supply increases.

Bob Michele, Chief Investment Officer and Global Head of Fixed Income at JPMorgan Asset Management, stated on Bloomberg TV, “We’re telling clients ‘just get into the bond market,'” noting that “Yields are coming down.”

So far this year, companies have issued over $1.2 trillion in high-quality corporate bonds, marking an almost 30% increase compared to last year. Andrei Skiba, Head of U.S. Bonds at RBC Global Asset Management’s BlueBay, suggested that the recent rate cut could prompt even more companies to issue bonds to capitalize on decreasing yields.

Investors have been preparing for a slowdown in corporate debt sales in the weeks before the presidential election. This could raise concerns about inflation and push bond yields higher.

In contrast, the high-yield CDX index, which trades based on price, rose nearly 0.3 cents against the dollar before retracing much of that gain. Hunter Hayes, Chief Investment Officer at Intrepid Capital Management and Co-Lead Portfolio Manager of the Intrepid Income Fund, commented, “This rate drop is very supportive for high yield and could provide a sanguine backdrop for refinancings later this year and into 2025.”