Investors holding cash may want to start shifting some of their funds into bonds, according to a new report from BlackRock. The bond market has seen some volatility due to uncertainty about interest rates and the Federal Reserve’s monetary policy. On Friday, the 10-year Treasury yield briefly fell below 4.5% as job growth in April was weaker than expected and the unemployment rate unexpectedly rose. Bond yields are inversely related to prices. “It’s time to start moving into fixed income, especially at current yield levels,” said Steve Laipply, global co-head of iShares fixed income ETFs and co-author of the BlackRock paper. He noted that the U.S. 10-year Treasury yields have reached levels not seen in 20 years. For example, BlackRock reported that the Markit iBoxx U.S. Dollar Liquid Investment Grade Index returned 5.3% in March 2024, compared with 4.10% in March 2004 and 3.43% in March 2020. Lepley said investors should not try to time the market now, especially given the Fed’s history of not “sending clear signals in advance.” “It may not be possible to reach peak interest rates,” he added. In fact, long-term yields such as the five-year bond have historically led policy shifts, the report said. “History tells us that if investors wait for clear, unambiguous answers about rate cuts, they may miss the opportunity to lock in higher yields,” BlackRock reported. The Fed has paused interest rate hikes since July 2023. interest. After this week’s Federal Reserve meeting, which kept interest rates steady, and Friday’s jobs report, traders now expect two rate cuts before the end of the year, starting in September, according to CME Group’s FedWatch tool. BlackRock said bonds historically perform best during “hold” periods. Lepley said that during this cycle, bond returns have increased slightly since the Fed suspended its policy. “This time it’s even rougher,” he said. He recommends dollar-cost averaging, or increasing exposure over time, to grow your fixed-income allocation. In fact, many investors are currently severely underinvested in fixed income. The BlackRock report, which analyzed Morningstar data on U.S. bond and money market ETF and mutual fund assets as of Jan. 31, showed their average allocation to the asset class was just 19%. The size of the revenue portion,” Lepley said. Choosing individual bonds or bond funds depends on investor preference, he said. Using a bond fund or ETF allows investors to gain diversification at a lower cost than purchasing individual bonds. BlackRock believes investors should take a holistic approach that can combine the two. Within funds, they can be either passively or actively managed, Lepley said. For now, he thinks mid-range duration might be a good place to start. For those looking to gain broad exposure to U.S. investment-grade bonds, BlackRock’s passively managed iShares Core U.S. Aggregate Bond ETF (AGG) tracks the Bloomberg U.S. Aggregate Index. Its 30-day SEC yield is 4.81% and its expense ratio is 0.03%. It is valid for six years. AGG YTD mountain iShares Core US Aggregate Bond ETF Year-to-date The iShares Core Total USD Bond Market ETF (IUSB) is also a passively managed broad bond market fund that adds exposure to underlying high-yield bonds. Its 30-day SEC yield is 5.12% and its expense ratio is 0.06%. For actively managed funds, BlackRock has its Flexible Income ETF (BINC). Its 30-day SEC yield is 6% and its net expense ratio is 0.4%.
