3 Bond Mutual Funds To Gain From Fed's Balance Sheet Runoff
Zacks Investment Research | Feb 21, 2019 09:59PM ET
The much-awaited minutes from Federal Open Market Committee’s meeting held in January were released on Feb 20th. Almost all the Fed officials stated that they wanted to finish unwinding the humongous $3.8 trillion balance sheet by the end of 2019. They also look to reinvest the mortgage-backed securities (MBS) into Treasury after successfully finishing balance sheet unwinding.
Impact of Fed’s Balance Sheet Unwinding
The immediate effect of a balance sheet runoff from the Fed will be lowering of bond prices. This will also lead to rising interest rates. Higher interest rates make operations more expensive for companies, lowering their earnings or profits.
Lower corporate earnings drive stock prices down and higher interest rates weigh on bond prices. What does this mean for mutual funds? This leads to lower market values for both stocks and bonds in a fund’s portfolio. However, interest income from bond mutual funds increases. Interest income rises as portfolio managers buy bonds that are yielding more income, because market interest rates are higher during periods of restrictive Fed monetary policy.
3 Best Fund Choices
We have, thus, selected three bond mutual funds carrying a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) that are poised to gain from such factors. Moreover, these funds have outstanding one and three-year returns. Additionally, the minimum initial investment is within $5000.
We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance, but also on the likely future success of the fund.
The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are the primary reasons why one should be parking money in mutual funds (read more: Zacks Investment Research
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.