BlackRock’s iShares strategy team said investors should take advantage of soaring bond yields and reinvest cash where possible. Surprisingly high economic growth and inflation data boosted bond yields in 2024. Earlier this week, the 10-year Treasury yield hit a fresh 2024 high. But that won’t last, according to iShares’ Spring Investing Outlook. “We believe the recent pickup in interest rates may be the last best opportunity to extend duration,” wrote Gargi Pal Chaudhuri, chief investment and portfolio strategist for the Americas at BlackRock. YTD 10-Year U.S. Treasury Yield Mountain Benchmark The 10-year Treasury yield has been rising through 2024. Duration is a measure of how a bond’s value changes with interest rates. Generally speaking, the value of bonds rises as interest rates fall, with bonds with longer maturities rising the most. Although traders continue to lower their expectations for the number of interest rate cuts by the Federal Reserve this year, the market generally believes that the central bank’s benchmark interest rate has peaked, currently at 5.25%-5.50%. This means that downside risks to long-dated bonds should be limited, with prices likely to rise whenever the Fed cuts interest rates. Many investors appear unprepared to take advantage of this situation. While bond funds have been seeing inflows this year, there are still plenty of investors holding excess cash in short-term accounts. For example, retail investors had deposited $2.4 trillion in money market funds as of the last week of March, according to the Investment Company Institute. Kristy Akullian, head of iShares investment strategy in the Americas at BlackRock, told CNBC: “We do think investors are still biased towards cash and underweight the duration of their portfolios.” Specifically, the iShares team saw The value of the so-called middle part of the market. Different funds that offer this type of investment include the iShares 3-7 Year Treasury Bond ETF (IEI), the SPDR Portfolio Treasury Note ETF (SPTI), and the Vanguard Treasury Note ETF (VGIT). There were also corporate credit index funds during this period. “It’s not just how much duration you have in your portfolio, it’s where you get it from. So where you are on the curve does matter, and we prefer to be somewhere around five years,” Akulian said. Already, people are turning to these bonds in 2024, although the short-term results have been less than ideal. Intermediate-term bond ETFs saw $17 billion in inflows in the first quarter, according to Strategas Research, making them one of the most popular fund categories. Akulian said investors should not increase duration excessively because long-term bonds on the market carry additional risks. “The long-term issue is that we think it could still come under pressure from supply,” she said. Akullian said that for investors who do want to take on more risk, such as adding high-yield bonds in addition to duration, it makes sense to consider active funds like the BlackRock Flexible Income ETF (BINC). Even if interest rates fall, riskier bonds may generally not be worth their current prices. “The conundrum right now is that aggregate yields look really attractive, but at the same time credit spreads are very tight,” she said.
