The Federal Reserve’s rate-cutting campaign is expected to continue in 2025, but opportunities for solid yield abound – if you know where to look. The central bank is widely forecasted to make a quarter-point cut at the conclusion of its policy meeting next week. Fed funds futures trading suggests policymakers are likely to follow this rate reduction – the third in this cycle – with a pause in January, according to the CME FedWatch tool . Cash investments are already seeing the impact of the lower-rate environment. The Crane 100 Money Fund Index has an annualized seven-day current yield of 4.43%, down sharply from 5.13% back in late July. “We believe this is a good time for investors to remember the role that fixed income allocations can play in a diversified portfolio,” said Dominic Pappalardo, Morningstar’s chief multi-asset strategist. “We think now investors should be moving cash off the sidelines and going into longer-term fixed income assets.” The benefits of adding longer-dated assets are twofold, Pappalardo said. First, investors can generate positive real yield – that is, the difference between the yield earned minus the inflation rate, he said. Second, investors benefit from using fixed income as a hedging component against market downturns, meaning that bonds are generating attractive interest income and longer-dated issues will see price appreciation as rates fall. Bond prices and yields move in opposite directions. Further, issues with longer maturities tend to have greater price sensitivity as rates fluctuate, which is known as duration. Seeking solid yields A fixed income portfolio with duration in the intermediate part of the yield curve – that is, a duration of three-and-a-half to six years – allows investors to balance risk and benefit, Pappalardo said. However, certain corners of the fixed income market are looking attractive, and they could play a role in a diversified fixed income sleeve. For starters, Vishal Khanduja, head of broad markets fixed income at Morgan Stanley Investment Management, pointed to agency mortgage-backed securities. “They’re a great place to be in,” said Khanduja, who is also a portfolio manager on the Eaton Vance Total Return Bond ETF (EVTR) . “We think the fundamentals are strong.” He also likes bank loans. Institutional investors snap up bank loans, which lenders make to companies, and benefit from the loans’ floating coupon rate. While these loans tend to be below investment grade, they’re secured by the borrower’s assets. This means the lender is at the top of the list to get paid if a borrower goes bankrupt. These loans are “helped by the fact the Fed isn’t raising rates and the rates aren’t at zero,” Khanduja said. In fact, the lower rates could benefit the companies that are borrowing, he added. Looking outside of the U.S. Another corner that may include some additional yield is emerging markets debt, according to Morningstar’s Pappalardo, who suggests a “sprinkle” of this asset class may benefit a diversified portfolio. “In emerging markets, which are below investment grade, the real yield is quite appealing,” he said, noting that Brazil’s five-year bond yield of 13.3% is attractive when compared against that nation’s inflation rate of 4.4%. Mexico is another example, where the five-year bond is yielding 10.4% against an inflation rate of 4.6%. “You have 6% to 9% real yield there, and the margin of safety is sufficient for investors to consider allocating to these markets,” Pappalardo said. Even as certain corners of the fixed income world are compelling, investors should keep an eye toward quality overall within their portfolio and avoid chasing yield. “We would suggest investors don’t move down in credit quality,” Pappalardo said, noting that riskier fixed-income assets could counteract their hedging benefits. “Fixed income allocations may provide ballast to investors’ portfolios to get through volatile periods with a little more stability.”