Bonds: A Savvy Move for Investors Seeking Stability in Uncertain Times
Navigating the Bond Market’s Ups and Downs
With the bond market facing volatility amid concerns about interest rates and Federal Reserve policy, LA News Center recently reported that investors with cash reserves may consider shifting some to bonds.
The recent release of weaker-than-expected job growth numbers and an unexpected rise in the unemployment rate led to a brief dip in the 10-year Treasury yield below 4.5%. It’s important to note that bond yields and prices move in opposite directions.
“This is a prime time to start reallocating to fixed income, particularly with yields at these levels,” advises Steve Laipply, global co-head of iShares fixed income ETFs and co-author of a BlackRock report. Yields have reached 20-year highs, with the Markit iBoxx USD Liquid Investment Grade Index currently yielding 5.3%, significantly higher than the 4.10% it yielded in March 2004 and the 3.43% of March 2020.
Avoiding Market Timing Pitfalls
Investors are cautioned against trying to time the market, especially considering the Fed’s historical tendency not to provide “ample warning” before policy shifts. “Accurately predicting the peak in rates is virtually impossible,” Laipply points out.
BlackRock’s report emphasizes that longer-term yields, such as those of the 5-year Treasury, have often foreshadowed policy changes. “History demonstrates that waiting for a definitive signal on rate cuts can lead investors to miss out on locking in higher yields,” the report states.
Federal Reserve Pause and Bond Performance
Since July 2023, Federal Reserve interest rate hikes have been on hold. Following the recent Fed meeting, where rates were held steady, and the subsequent jobs report release, traders are now predicting two rate cuts by the end of the year, beginning in September, according to the CME Group’s FedWatch tool.
Historically, bonds have performed well during periods when interest rate changes are put on hold. In the current cycle, despite market volatility, bonds have shown a modest positive return since the Fed pause, according to Laipply.
Dollar-Cost Averaging and Portfolio Allocation
For investors seeking a prudent strategy, dollar-cost averaging is recommended. This involves gradually adding exposure to fixed income over time, mitigating the risk of significant short-term losses.
BlackRock’s recent analysis of Morningstar’s data indicates that many investors are currently underweight in fixed income, with an average allocation of only 19%. “This presents an opportune time for investors to rectify their portfolio’s fixed-income exposure,” Laipply advises.
Exploring Fixed-Income Investment Options
In choosing individual bonds or bond funds, investors can opt for personalized preferences. Bond funds and ETFs offer diversified exposure, often at a lower cost than investing in individual issues.
BlackRock’s ETF Recommendations
For a comprehensive approach, BlackRock suggests a combination of active and passive fund strategies. Laipply currently favors intermediate duration bonds as a starting point.
For broad U.S. investment-grade bond exposure, investors can consider the passively managed iShares Core U.S. Aggregate Bond ETF (AGG), which tracks the Bloomberg U.S. Aggregate Index. It boasts a 4.81% 30-day SEC yield and a modest 0.03% expense ratio.
Alternatively, for a fund that encompasses a wider range of bonds, potentially including higher-yielding assets, the iShares Core Total USD Bond Market ETF (IUSB) is a suitable option. It provides a 5.12% 30-day SEC yield and a slightly higher 0.06% expense ratio.
Finally, investors seeking an actively managed solution can opt for BlackRock’s Flexible Income ETF (BINC), which offers a higher 6% 30-day SEC yield with a net expense ratio of 0.4%.
Data sourced from: cnbc.com
