Investors with cash on the sidelines may want to invest some of that money in bonds, according to a new report from BlackRock. The bond market has seen some volatility due to uncertainty surrounding interest rates and the Federal Reserve's monetary policy. On Friday, 10-year Treasury yields briefly fell below 4.5% after weaker-than-expected job growth for April and a surprise rise in unemployment. Bond yields move in the opposite direction to prices. “It's time to migrate back to fixed income, especially with yields at these levels,” said Steve Laipply, global co-head of iShares fixed income ETFs and co-author of the BlackRock report. US10Y YTD high yield on 10-year government bonds Yields are at a level not seen in twenty years, he emphasizes. For example, the Markit iBoxx USD Liquid Investment Grade Index returned 5.3% in March 2024, compared to 4.10% in March 2004 and 3.43% in March 2020, the report said. What investors shouldn't do right now is try to time the market, especially since the Fed historically hasn't given “the all-encompassing signal” far in advance, Laipply said. “It will probably be impossible to call the spike in interest rates,” he added. In fact, longer-term yields, such as those on 5-year government bonds, have historically anticipated policy changes, the report said. “History tells us that investors can miss out on higher rates if they wait for a clear, definitive answer on rate cuts,” the BlackRock report said. Federal Reserve interest rate increases have been suspended since July 2023. After this week's Fed meeting, which held rates steady, and Friday's jobs report, traders are now pricing in two rate cuts by the end of the year, starting in September, according to CME Group's FedWatch tool. According to BlackRock, bonds have historically delivered their strongest performance during hold periods. In this cycle, bonds have returned slightly positive since the Fed's pause, Laipply said. “It was bumpier this time,” he said. He suggests dollar-cost averaging, or adding exposure over time, to increase your fixed income allocation. In fact, many investors are currently significantly underweight in fixed income securities. They have an average allocation of just 19% to this asset class, according to the BlackRock report, which analyzed Morningstar's data from U.S. bond and money market-traded funds and mutual funds as of Jan. 31. “It's a very attractive opportunity for investors to right-size their fixed income side of the portfolio,” Laipply said. Choosing individual bonds or bond funds comes down to investor preference, he said. from a bond fund or an ETF, an investor can gain diversified exposure more cheaply than buying individual issues. BlackRock believes that investors should take a holistic approach, which can include a combination of both. Within funds, they can be both passive as actively managed, Laipply says. For now, he thinks medium-duration may be a good place to start. BlackRock the Bloomberg US Aggregate Index It has a 30-day SEC yield of 4.81% and an expense ratio of 0.03% It has an effective maturity of 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 potentially higher-yielding names. It has a 30-day SEC yield of 5.12% and an expense ratio of 0.06%. For an actively managed fund, BlackRock has its Flexible Income ETF (BINC). It has a 30-day SEC yield of 6% and a net expense ratio of 0.4%.
