Historically, rate cutting cycles tend to be long, lasting 26 months with the Effective Fed Funds Rate falling 441 basis points on average.
Over a long rate cutting cycle, investors in cash and cash equivalents see income and total return fall relative to longer duration alternatives. As the chart demonstrates, high-quality fixed income outperformed 3-month Treasury bills after the start of rate cuts.
Outperformance of high-quality fixed income continues to increase once cuts start
Returns of 3-month T-bills and high-quality fixed income after Fed starts cutting
- 3-month T-bills
- Municipal Bonds
- U.S. Credit 1-3 Years
- U.S. Aggregate
Source: Principal Global Investors. Reflects the average total return in relation to the six rate cuts over the time period from October 1982 to June 2024. The beginning of the rate cut dates: August 1984, June 1989, July 1995, January 2001, September 2007, August 2019. Data represented by St. Louis Fed 3-month T-bill, Bloomberg U.S. 1-3 Year Index, Bloomberg Municipal Index, and Bloomberg U.S. Aggregate Bond Index.
High-quality fixed income does well with cuts regardless of the type of landing
By the numbers: Since 1982, there were six rate cutting cycles.
Three times the U.S. economy went into a recession within 12 months after the first cut.
Three times the U.S. economy avoided a recession.
In all six instances, high-quality fixed income had positive return.
We believe now's the time to extend duration in high-quality fixed income
Set new goals as the next growth cycle takes shape.
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Footnotes
Index descriptions:
Bloomberg U.S. Aggregate Bond Index is the most widely followed broad market U.S. bond index. It measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.
Bloomberg U.S. Treasury Index measures U.S. dollar-denominated, fixed-rate, nominal debt issued by the U.S. Treasury. Treasury bills are excluded by the maturity constraint. STRIPS are excluded from the index because their inclusion would result in double-counting.
Bloomberg Municipal Index covers the USD-denominated Long-Term tax-exempt bond market with four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds.
Bloomberg U.S. 1-3 Year Index measures the performance of investment grade, US dollar-denominated, fixed-rate, taxable corporate and government-related debt with 1 to 2.9999 years to maturity.
Index performance information reflects no deduction for fees, expenses, or taxes. Indices are unmanaged and individuals cannot invest directly in an index.
Risk considerations
Past performance does not guarantee future return. Investing involves risk, including possible loss of principal. Fixed-income investment options are subject to interest rate risk, and their value will decline as interest rates rise. Potential investors should be aware that Investment grade corporate bonds carry credit risks, default risk, liquidity risks, currency risks, operational risks, legal risks, counterparty risk and valuation risks. Lower-rated securities are subject to additional credit and default risks. A portion of the Fund's income may be subject to state and/or local taxes, and it may be subject to federal alternative minimum tax (AMT) for certain investors.
Important information
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All figures shown in this document are in U.S. dollars unless otherwise noted.
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