BlackRock's Laipply: Yes, You Can Still Lock in Yield

BlackRock's Laipply: Yes, You Can Still Lock in Yield

Bond ETFs offer many ways to capture the highest yields in 20 years.

Reviewed by: Staff
Edited by: Ron Day

For investors who have stayed in cash while bond yields have ping-ponged, now is your chance to lock in the highest rates in 20 years. And that window may not stay open much longer.

Investors who are kicking themselves for not snapping up fixed-income exchange-traded funds in October when the 10-year U.S. Treasury peaked at 5% and 2-year U.S. Treasury hit 5.2%, have an opportunity to buy bond ETFs that aren’t far off those peaks—and are up soundly from the late December/early January lows when the 10-year was 3.8% and the 2-year near 4.1%. Currently yields are 4.41% and 4.82%, respectively.

The volatility comes as the Federal Reserve pushes back when it might cut interest rates. The CME FedWatch Tool shows a 91% that the Fed will stand pat at the June Federal Open Market Committee meeting. Bond traders are pricing in one to two rate cuts by the end 2024.  

Steve Laipply, global co-head of iShares fixed income ETFs at BlackRock, says there are not a lot of reasons to wait to get out of cash, even if the recent bond volatility makes them nervous.

“I'm not going to pretend that I know exactly the right time…. (But rates) are higher than 20 years ago, which is an amazing stat.”

Laipply also pointed to a recently released paper from the asset manager that shows historically that longer-term yields tend to move ahead of policy shifts. The paper shows during the 2001-2002 rate-cut cycle, money market yields fell from a high of 5.8% in March 2001 to 2.6% in March 2002 and were under 2% by July 2002.

BlackRock Bond ETF Flows

Some investors are buying bonds, and BlackRock says iShares fixed-income flows year-to-date are $37.27 billion globally and $24.67 billion in the U.S. iShares multisector flows this year are $19.1 billion globally and $17.5 billion in the U.S.

Last year most of BlackRock’s bond flows were into government debt, while this year, investors are broadening exposure, buying multisector bonds, such as the iShares Core U.S. Aggregate Bond ETF (AGG), or the iShares Core Total USD Bond Market ETF (IUSB), two index-based funds. He also pointed to strong interest in the BlackRock Flexible Income ETF (BINC), an active, global-debt-market fund managed by Rick Rieder, the firm’s global chief investment officer of fixed income.

Those flows reflect investor interest in allocating to core products, while still staying in high-quality bonds, he says.  

Investors may be dipping a toe into bonds, but BlackRock’s research shows most portfolios are underweight fixed income. Based on total U.S. industry assets under management, the average fixed income allocation is 19%, down from 24% at the start of March 2020, when the Covid-19 pandemic started. That’s significantly under the typical balanced portfolio of 60% equities and 40% bonds.  

Those figures suggest room to add fixed income to take advantage of these high rates, Laipply says, and unlike 20 years ago when rates were at these levels, investors have myriad options to use ETFs and build a portfolio appropriate for their risk tolerance and time horizon.

“It affords you the ability to do things you simply couldn’t dream of in 2004,” he says.

As an example, for investors hesitant to go too long duration, they can allocate to something like the iShares 1-5 Year Investment Grade Corporate Bond (IGSB) or shorter-dated intermediate Treasuries, such as the iShares 1-3 Year Treasury Bond ETF (SHY) he says, while keeping some money in cash if they prefer.

ETFs “allow you to pick your journey for this reallocation,” he says.

Debbie Carlson focuses on investing and the advisor space for U.S. News. She is an internationally published journalist with bylines in publications including Barron's, Chicago Tribune, The Guardian, Financial Advisor, ETF Report, MarketWatch, Reuters, The Wall Street Journal and others.