MEDIA RELEASE: The US Federal Reserve has likely concluded its tightening campaign given the slowing economy and ongoing fallout from banking industry stress, according to US-based asset manager, American Century Investments.

Co-chief investment officer of global fixed income, Charles Tan, said the expectation is that the central bank may move into a rate-cut mode by the end of the year and in this environment, investors need to be wary of re-investment risk.

“It’s important to note that at its current range, the Fed’s short-term rate target is finally higher than the annual headline inflation rate.

“In hiking cycles dating back to 1973, the Fed has never stopped raising rates until the federal funds rate exceeded the inflation rate,” he said.

As a result of one of the fastest rate-hike cycles in 40 years, which may have just ended with the Fed’s tenth rate hike, investors have been able to enjoy attractive rates of income.

However, with an end to these high rates in the cards, investors will have to be more disciplined when it comes to finding yield.

According to co-chief investment officer for global fixed income, John Lovito, yields on short-term cash equivalents tend to move in sync with the Fed’s rate target. He said if the Fed eventually cuts rates, savings accounts won’t be the only investments to suffer, with yields on Treasury bills, cash deposits and other products likely to fall too.

“The dynamic between historical short-term rates and recessions suggests that investors holding cash equivalents still have time to potentially manage reinvestment risk. This refers to the inability to reinvest cash flows at a rate comparable to your current rate of return,” he said.

One way to mitigate re-investment risk is by moving out on the yield curve and finding longer-term debt instruments. This can help by locking in higher rates and adding duration, which can generate capital appreciation when rates fall.

“In a recession, it’s all about quality in fixed income and we believe higher-quality bonds with attractive yields - including US Treasuries and higher-credit-quality corporate and securitised bonds - may help investors weather tough times,” Mr Lovito said.

As in all periods of market uncertainty, it is important to remain disciplined and focus on investment plans. Diversification and focusing on risk management may be prudent in the current market climate.

“It’s also important to remember that attractive investment opportunities often emerge during market unrest,” he said.