Uncertainty is the key theme for markets on the eve of Election Day, but fixed income investors say there are a few opportunities to snap up solid yield even as the market holds its breath. Indeed, on Monday afternoon, the S & P 500 saw small losses while the 10-year Treasury yield inched slightly lower to about 4.3%. Meanwhile, the latest poll from NBC News showed Vice President Kamala Harris and former President Donald Trump locked in a ” dead heat .” Congressional races are also front of mind for investors, as a clean sweep for either party in Washington could have ramifications for tax and trade policy and new spending plans. “For the bond market, what matters most is the makeup of Congress,” said Andrew Szczurowski, portfolio manager for the Eaton Vance Strategic Income Fund (ETSIX) and co-head of the mortgage and securitized investment team at Morgan Stanley Investment Management. “If there’s a clean sweep for either party, the bond market sees it as higher deficits in either environment.” To make things even more interesting, the Federal Reserve will conclude its two-day policy meeting on Thursday with a decision on interest rates. Fed funds futures trading suggests a 98% likelihood of a 25 basis point cut, which would bring the target rate range down to 4.50%-4.75%. Deficit fears have played a part in the recent run higher in the 10-year Treasury yield, which was 3.63% as recently as Sept. 16. However, there are also offsetting factors in the bond market: namely the Fed’s move to cut rates and slowing economic growth, according to Anders Persson , chief investment officer, head of global fixed income at Nuveen. “Those are impacting the front end” of the Treasury yield curve, he said. “We are constructive on fixed income as a whole, despite these uncertainties, and we’re stressing to investors that yields are really quite attractive – and the income generation we can get from fixed income right now is quite powerful,” Persson added. Yield opportunities Heading into the election, Persson’s team is neutral on duration – the measure of a bond’s price sensitivity to changes in interest rates. They are focused on duration of three to seven years in taxable securities. Municipal bonds have caught his attention. “We find that the relative value in the muni space is becoming very attractive right now, and we will look to take advantage of that as we get through the election period,” Persson said. Municipal bonds generally offer lower yields compared to corporates of similar credit quality, but the true benefit is the tax-free treatment of their interest income on the federal level. What’s more, investors who live in the same state as the issuer of a municipal bond may also receive interest income free of state taxes. At a time when the nation is grappling with high deficits and the prospect of higher taxes as provisions in the Tax Cuts and Jobs Act expire at the end of 2025 , municipal bonds could be a solid addition to high-income investors’ portfolios. Consider that if an investor in the 32% federal income tax bracket gets a muni bond paying a tax-free yield of 3%, he would need to find a taxable investment yielding 4.41% to generate comparable income. More broadly, Persson’s team is also comfortable taking on a little more credit risk for some additional income, aiming for quality among high yield bonds and leveraged loans. “We are still assessing and still poised for the soft-landing outcome here,” he said. A selection of cheap buys have also emerged in the run-up to the election, according to Szczurowski of Morgan Stanley Investment Management. In particular, he likes agency mortgage-backed securities – that is, pools of mortgages that are sold to investors by issuers such as Fannie Mae and Freddie Mac. “The biggest buyers [of agency mortgage-backed securities] are banks, and the banks are in a wait-and-see mode until we get past the election – they want to get past the event risk,” he said, noting that it’s both “the cheapest sector and the biggest no-brainer.” Diversification Investors can pick up exposure to these corners of the bond market through exchange traded funds, using them to fill out and diversify their fixed income holdings. On the municipal bond side, offerings include the iShares National Muni Bond ETF (MUB) , which has a 30-day SEC yield of 3.35%. Vanguard also has its Tax-Exempt Bond ETF (VTEB) , with a 30-day SEC yield of 3.4%. Both funds have an expense ratio of 0.05%. Investors can also buy ETFs that are focused on mortgage-backed securities, such as the SPDR Portfolio Mortgage Backed Bond ETF (SPMB) , with has a 30-day SEC yield of 3.76% and an expense ratio of 0.05%. The iShares MBS ETF (MBB) has a 30-day SEC yield of 4.01% and a net expense ratio of 0.04%. For investors seeking an even simpler solution, core bond funds also give investors access to a wide array of fixed income instruments – including Treasurys, mortgage-backed securities and corporate bonds – with an intermediate duration. Some examples of those include the Fidelity Intermediate Bond Fund (FTHRX) , with a 30-day yield of 4.31% and an expense ratio of 0.44%, and the Baird Aggregate Bond Fund (BAGIX) , which has an expense ratio of 0.3% and a 30-day SEC yield of 3.98%.
