With declining interest rates, it's a 'great opportunity' to reassess bonds, advises expert.

• Financial experts advise investors to review their bond portfolio as the Federal Reserve lowers interest rates.
• Generally, a decrease in market interest rates can benefit certain sectors of the bond market.
• Investors may consider corporate and municipal bonds while shifting to longer-duration assets.

With the Federal Reserve lowering interest rates, investors should assess their bond portfolio, which may benefit from the dovish Fed policy.

In September, the central bank initiated its first easing campaign in four years by reducing its benchmark rate by 50 basis points, bringing it to a range of 4.75% to 5%.

Future rate cuts may not be as significant as predicted following a better-than-anticipated jobs report last week.

Experts suggest that the Fed policy shift could positively impact certain segments of the bond market. Generally, bond prices and market interest rates move in opposite directions.

Scott Ward, senior vice president of Compound Planning in Birmingham, Alabama, stated that this is an excellent opportunity to reassess bonds.

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In 2022 and 2023, the Fed raised interest rates, resulting in higher returns on savings, money market funds, and certificates of deposit.

As interest rates fall, holding onto cash may become "less attractive, less productive," according to Ward.

Bonds are now a safer option for long-term investors to achieve higher returns, according to him.

Here are some options to consider, according to financial advisors.

Corporate bonds

Consider medium- to longer-term corporate bonds in a falling-rate environment, suggests Ted Jenkin, CEO and founder of oXYGen Financial in Atlanta.

In the third quarter of 2024, the Morningstar US Corporate Bond Index outperformed the overall bond market, returning 5.8% compared to 5.2%.

During the pandemic, many corporations took advantage of low-interest rates to improve their financial stability and refinance their debt, according to Ward.

He stated that corporations would likely emerge from the rate hike cycle in a good condition.

Municipal bonds

In anticipation of potential future tax increases, municipal bonds may become increasingly attractive, especially for high-income tax state residents.

When residing in the issuing state, muni bond interest is exempt from both federal and state taxes, making it a popular investment choice. Additionally, muni bonds typically carry a lower risk of default compared to corporate bonds.

If the Fed continues to cut interest rates, longer-term municipal bonds are expected to perform better, according to Jenkin, a member of CNBC's Financial Advisor Council.

Ward stated that municipalities offer several desirable characteristics for long-term investors, such as the possibility of high returns and a lower risk profile.

Advisors extend bond 'duration'

Advisors consider duration when constructing a bond portfolio, which measures a bond's sensitivity to interest rate changes. The duration formula, expressed in years, includes the bond's coupon, time to maturity, and yield paid throughout the term.

Before the Fed's first interest cut in September, some advisors started lengthening bond duration.

Jenkins stated that his company began investing in "medium-term duration" bonds, defined as bonds with a maturity of five to 10 years, around four months prior to the Fed's first interest rate reduction.

Experts suggest that as interest rates decline, longer-term bonds should provide higher returns to investors.