3 Bond Mutual Funds To Gain From Fed's Balance Sheet Runoff

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 an 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.

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