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CNBC
11-06-2025
- Business
- CNBC
Wells Fargo's top ideas to help cushion your portfolio from rocky markets
With market volatility expected to continue through the summer, investors should consider cushioning their portfolios with income-generating assets, Wells Fargo said in its mid-year outlook. In fact, income generation is one of the firm's top five portfolio ideas for the rest of 2025. While the Treasury market has been rocky lately, fixed-income assets are offering a steady stream of cash flow, said Tracie McMillion, head of Wells Fargo's global asset allocation strategy. "Cash coming into a portfolio can be very important to income investors in particular, but it provides all investors with optionality," she said during a panel discussion Tuesday on the bank's investment outlook. 'Fireworks' this summer Wells Fargo expects limited upside for stocks this year and a recovery in 2026 , with the S & P 500 reaching 6,500 by the end of 2026. However, the path from here will be choppy and will likely include a 5% to 10% pullback due to several headwinds this summer, according to the firm. "There's a lot of news events and pretty material market-moving news events that all are going to converge in the months of July and August," said Darrell Cronk, president of Wells Fargo Investment Institute and chief investment officer for Wells Fargo's wealth and management division. "That's going to lead to, no pun intended, some fireworks that we think markets are going to have to digest." Notably, the pause on most of President Donald Trump's reciprocal tariffs is due to expire in July, with China's pause lifting in August. In addition, Trump has said he wants his " big, beautiful bill " of tax cuts on his desk by July 1. The legislation, which the Congressional Budget Office estimates will add $2.4 trillion to the deficit ovet the next 10 years, was passed by the House last month and is now before the Senate. Finding income To generate cash flow, Wells Fargo prefers intermediate-term fixed income assets, since short- and long-term bonds could be hurt by both future Federal Reserve monetary policy as well as fiscal policy, McMillion said. "As the yields on shorter maturities may fall faster than on longer maturities, we believe the best opportunities are in the intermediate space (five- to seven-year maturities), offering attractive income and exposing investors to less volatility than longer-dated maturities," she wrote in the outlook. One area the bank likes is investment-grade corporate bonds. For example, iShares 5-10 Year Investment Grade Corporate Bond ETF has a 30-day SEC yield of 5.32% and an expense ratio of 0.04%. Within investment-grade corporates, it favors telecom issuers, financials and utilities. Wells Fargo also likes residential mortgage-backed securities and asset-backed securities. Municipal bonds also present a good opportunity for investors, particularly general obligation bonds and essential service revenue bonds, said Brian Rehling, head of global fixed income strategy. VTEB YTD mountain Vanguard Tax-Exempt Bond ETF year to date For one, yields are attractive, especially when their tax advantage is taken into account. Income on munis is free of federal tax and, if the bondholder lives in the same state where the bond was issued, exempt from state tax, too. For example, the Bloomberg Municipal bond index currently yields 4.05%. Assuming the highest tax-bracket of 37%, that implies a taxable equivalent yield of about 6.43%, Wells Fargo said. Plus, while there has been some concern that the muni tax exemption could be eliminated or cut back as Congress looks for ways to offset the Trump administration's proposed tax cuts, Wells Fargo believes that is "extraordinarily unlikely." "[It] actually offers an opportunity for investors to get in at a little bit more attractive valuations," Rehling said. Diversifying beyond bonds Investors may also consider diversifying into other asset classes, like dividend stocks in some of the sectors Wells Fargo favors, McMillion said. Wells Fargo's most recommended equity sector is energy, which tends to pay a lot of income. For instance, the Energy Select Sector SPDR Fund has a 30-day SEC yield of 3.31% and an expense ratio of 0.08%. Among the other sectors the firm is favorable on are utilities and financials, which also pay high dividends. XLE YTD mountain Energy Select Sector SPDR Fund year to date Within energy and utilities, midstream energy, electric utilities and independent power and renewable electric producers "can benefit from strong fundamental positioning while leveraging secular growth in power demand," Wells Fargo said in its outlook. "The leaders in these industries own and operate some of the most difficult-to-replicate assets on the planet, including long interstate pipelines and nuclear power plants," Wells Fargo said. "These companies do not have meaningful direct exposure to commodity prices, but rather, benefit from the long-term growth in energy demand from data centers, electrification and reshoring of specific industries." Lastly, direct lending, a subset of private debt, offers the most attractive yields and can be a good way to add income for qualified investors who meet financial thresholds, McMillion said. The yield on the Cliffwater Direct Lending Index , an asset-weighted index of approximately 14,800 directly originated middle-market loans, was 11% as of December 31, 2024, she noted.
CNBC
05-05-2025
- Business
- CNBC
The big opportunity in these tax-free bonds is 'closing and closing fast,' strategist says
This could be a fleeting moment in time to snag excellent income in municipal bonds, according to several strategists. Muni bond prices slipped in April amid tariff-induced market volatility, with the Vanguard Tax-Exempt Bond ETF (VTEB) dropping about 0.9% last month. Bond yields move inversely to prices. Higher net-worth investors typically turn to muni bonds because their interest income is free of federal tax and exempt from state tax when the holder lives in the state in which the bond is issued. "The top opportunity for municipal investors remains, but it is closing and closing fast," Tom Kozlik, head of public policy and municipal strategy at Hilltop Securities, wrote in a note Friday. "The potential for falling interest rates due to economic weakness presents a compelling argument for investors to seize this fleeting window of opportunity." The Vanguard Tax-Exempt Bond ETF currently has a 30-day SEC yield of 3.93% and an expense ratio of 0.03%. VTEB YTD mountain Vanguard Tax-Exempt Bond ETF Not only are yields attractive, but municipal bonds look cheap compared to Treasurys, said Richard Saperstein, chief investment officer at investment firm Treasury Partners. These days, munis are offering attractive relative value, he said. "This becomes an outstanding opportunity," Saperstein added. The sell-off in munis had to do largely with technical factors, like elevated supply and selling into tax season, as well as the stock market decline, he said. He agrees that the chance to grab these yields isn't going to stick around. "They'll be here until it's not," Saperstein said. "This will disappear without any warning, because the absolute relative levels of municipal bond yields are so attractive, they will disappear as soon as the supply congestion clears itself up." Bank of America is predicting yields shouldn't shift too much in the first two weeks of May. The firm expects the key driver to be April's consumer price index data, set to be released next Tuesday. "Munis should outperform Treasuries in May given the more balanced supply/demand environment and cheap muni ratios," strategist Yingchen Li wrote in a note Friday. "We like 10yr area high grade munis for performance in the coming months." Vanguard portfolio manager Grace Boraas sees a number of benefits for muni bond investors this year, including attractive tax-equivalent yields of around 7% for average investors — and north of 9% for those from high-tax states like California and New York. Tax-equivalent yield refers to the yield a taxable bond needs to generate in order to be equal to that of a tax-free bond. Consider that a single filer in the 24% federal income tax bracket who has a muni bond with a tax-free yield of 3% would have to shop for a taxable investment with a yield of 3.95% in order to generate a comparable level of income. Boraas said that muni bonds' historical ratio to Treasurys may stay cheap for the foreseeable future. She was referring to the municipal bonds to Treasury yield ratio, which compares rates on issues with similar maturities. "Eventually we expect that once the uncertainty in the market calms down a little bit, those ratios will normalize and provide a good tailwind from a performance perspective," she said. On top of that, fundamentals remain strong. "The municipal market, fundamentally, is doing very well. And then additionally, for state and local governments, they have an ample rainy day fund," Boraas said. "As we see the picking up of potential recession risks in the economy, fundamentally speaking, munis are very well positioned to weather that storm." Those high yields also provided a nice cushion during the latest sell-off, Shannon Rinehart, senior portfolio manager of municipal debt at Columbia Threadneedle Investments, pointed out. MUB YTD mountain iShares National Muni Bond ETF "The sell-off has been mitigated. This is different from 2022 because of where we are starting," she said. "Starting point matters for fixed income, and … despite the sell-off — which was pretty extraordinary, historically the second worst sell off we've ever experienced in the muni market — we are still seeing positive returns in the very front end." "What municipals are still providing is that buffer that folks look to for their fixed income investments," she added. While sell-offs can happen swiftly, the recovery takes a bit more time, Rinehart noted. Where to find opportunity Treasury Partners' Saperstein focuses on general obligation bonds, which are backed by the full faith and taxing power of the authority. He finds toll roads attractive, as well as transit systems, water and sewer districts and other general essential services bonds. While buying bonds within your home state will give you a local tax break, Saperstein advises not putting 100% of your portfolio there. "We want to spread the risk of being concentrated in one state in case there's a tail-risk event," he said. "Many times for investors that are in a high-tax state, by diversifying, you actually get a higher yield on a pre-tax basis, and after paying the taxes, you're equivalent or even better off than buying a municipal bond from your home state." Meanwhile, Columbia Threadneedle's Rinehart is finding opportunity amid a bifurcated market. For instance, she is overweight hospitals, but likes urban primary providers versus rural providers. That's because rural hospitals have a higher level of Medicaid payers, she said. "They are running on very, very thin boot straps as it is," she said. "If you talk about Medicaid being reduced and or large portions of their population losing Medicaid completely, it's just not a very viable business model." Rinehart also likes the premium in AMT bonds — those subject to the alternative minimum tax. These bonds spin off interest income that is subject to federal taxes if the AMT also applies to the taxpayer who owns the bond in a taxable account. The AMT applies to a small number of high-income taxpayers.
