Wealth Insights

Money Moves to Make Now

It may be time to rebalance your fixed-income investments.

Heading into the year, the landscape of fixed income investing presents both challenges and opportunities. With interest rates still subject to economic fluctuations influenced by an incoming administration, investors have an appetite for portfolio optimization with stability and returns in mind.

“This year it is crucial to consider strategies such as rebalancing and diversification with a focus on higher-quality bonds and inflation-protected securities,” says Scott Flurry, Director of Investment Strategy at Regions Investment Management in Birmingham, Alabama. “Balancing between long-term and short-term maturities can help mitigate interest rate risk while capitalizing on yield opportunities.”

Navigating these moves effectively requires staying informed on economic trends and central bank policies, as well as any global market influences. The goal is to ensure a well-rounded and adaptive fixed income strategy.

The bottom line?

If your portfolio has been in ’set it and forget it’ mode – which Flurry doesn’t recommend – it may be time to reconsider your allocations and rebalance to align with the current environment, even if your long-term goals haven’t changed. Over the last two years, the S&P 500 is up a combined 57.82% while the Bloomberg Aggregate Index is only up 6.85%. So, if you haven’t rebalanced, your asset allocations are likely way out of line with your targets. Consider the following asset classes.

Fixed Income Money Moves: Treasury Bonds

Flurry calls federal Treasury bonds “the plain vanilla of the bond market,” but that doesn’t mean they’re lacking flavor. There tends to be less risk involved, and they offer a fixed return, which is particularly useful for people who rely on their portfolios for their spending needs.

Short-term bonds, which provide a return in two years or less, tend to closely track the Fed’s activity. Since Flurry thinks the Fed is very near the finish line of rate cuts, he expects short-term yields to remain attractive, as well.

Longer-term Treasuries require patience, as they operate on a horizon of 10 years or more. Rates for 10-year bonds incorporate a longer-term economic outlook, and a new administration in Washington creates some uncertainties. In the face of these unknowns, the bond market is showing some concerns that inflation may reaccelerate as long-term rates have moved in lockstep, approaching the 5 percent range.

“In terms of income generation,” Flurry says, “there’s a lot of value in the short end right now with 2-year Treasury yields at about 4.25%.”¹ However, following two years of an inverted yield curve, yields on longer term bonds are now higher than shorter term yields and are once again worth considering. For this reason, Flurry recommends considering a combination of short- and long-term Treasuries.

Fixed Income Money Moves: Corporate Bonds

Corporate bonds are considered riskier than U.S. Treasury bonds, so the creditworthiness of the company is important and corporate bond ratings and economic health play a role in performance. But in 2025, these investments may offer potential opportunities for those seeking higher yields. With interest rates stabilizing, many corporations are expected to issue bonds to fund growth and refinances, creating attractive investment opportunities.

This bond class offers numerous maturity options from short term (three years or less) to medium term (four to 10 years) to long term (more than 10 years). This allows investors to plan ahead and stagger their payout timelines.

When discussing corporate bonds, you’ll often hear the term “yield spread” used. This refers to the difference between the corporate bond yield and the similar maturity Treasury yield. Flurry explains, “Corporate spreads have been very low for a very long time, and in 2024, reached levels not seen since the mid-1990s. Despite tight spreads we still see some attractiveness in corporate bonds due to healthy balance sheets and creditworthiness.”

“We think corporate bonds do offer some value right now,” noted Flurry. “Company balance sheets are good, and we’re not seeing any kind of significant credit deterioration yet.”

Investment-grade bonds have historically provided relatively safer returns, while high-yield bonds, or ‘junk bonds’ come with higher risk, but potentially higher rewards.

“As economic conditions evolve in the coming year, diversifying across industries and bond maturities may help mitigate risks while optimizing returns in a dynamic market environment,” says Flurry.

Fixed Income Money Moves: Mortgage-Backed Securities

Investing in mortgage-back securities (MBS) offers investors exposure to real estate markets while providing relatively attractive yields. These asset-backed securities are created by pooling together a large number of individual home loans. As homeowners make mortgage payments, investors receive a portion of the payments.

“Mortgage-backed securities can be especially attractive when interest rates are stable,” noted Flurry. “They offer higher yields than government bonds while still benefitting from the backing of the U.S. government. Another benefit of mortgage-backed securities is that they tend to offer monthly payouts rather than lump-sum payments upon maturity.”

Mortgage-backed securities, however, aren’t without potential risks such as prepayment by homeowners, which reduces cash flow for the MBS investor. These investments can also be sensitive to changing interest rates and economic conditions.

During economic instability or rising rates, MBS may experience volatility, potentially impacting returns. But for investors looking to diversify their fixed-income portfolios, MBS can be an attractive option. Though with all investments, it is important to assess the underlying risks and understand the impact of market conditions. This is an important aspect of regular meetings with your Wealth Advisor, notes Flurry.

Fixed Income Money Moves: Municipal Bonds

Municipal bonds, or “munis,” are bonds issued by state and local governments, which they use to fund public works and infrastructure. Munis are generally considered safer than corporate bonds, but the trade-off is that they typically offer lower returns.

Flurry notes that whether or not muni bonds are a good investment will depend on their yields compared to Treasuries, corporate bonds and mortgage-backed securities.

“With the increase in attractiveness of corporate bonds and mortgage-backed bonds,” he says, “municipals don’t look as attractive as they did in recent years.” However, because interest earned on municipal bonds is generally tax-free, this asset class could be a good investment choice for people at the highest levels of the income tax bracket.

Fixed Income Money Moves: Treasury Inflation-Protected Securities (TIPs)

TIPs are yet another option to consider. Issued by the federal government, TIPs are indexed to inflation. “Your interest from a TIP floats depending on what the Consumer Price Index (CPI) does,” says Flurry. However, only a fixed portion of the income is paid out every six months while the CPI adjustment is added to the principal, which can be a drawback for those dependent on the income.

If the bond market expectations are correct and inflation begins to tick back up, TIPs could be a solid investment in that environment.

Goal Setting and Portfolio Construction

Generally speaking, we find many investors may be overdue for a portfolio rebalance. Equity market returns have been high with 26% and 25% increases, respectively in the past two years.1 As a result, it may be that portfolio allocations have shifted out of alignment. Rebalancing with bond yields at current levels may be a move worth considering for increased stability and returns.

“If you were on a path—let’s say 15 years ago when you were 40, and now you’re 55—maybe you haven’t reallocated back to bonds,” Flurry explains. “Maybe you’re at 75 percent equities, and you should have been shifting that down, I think getting back on a path of changing that asset allocation over your life cycle makes a lot of sense.”

Flurry reminds investors that trying to time the market is never a good idea. “With regard to market moves in a volatile environment, we always caution that investors really need to keep their eye on their goals and then sit down with a qualified investment advisor to plan your asset allocations.”

The important thing is to keep focused and reassess periodically with your Private Wealth Advisor. There are going to be times when your portfolio is outperforming and times when it’s underperforming. “Ask yourself if you’re still on track to meet your needs and keep your future goals in sight,” he says.

Talk to your Regions Wealth Advisor about:

1. Reviewing and rebalancing your portfolio to account for a changing economic environment.
2. How to develop and implement an investment strategy that fits your short-term and long-term financial needs.

Interested in talking with an advisor but don’t have one?
Find a contact in your area.

¹ Source: Bloomberg