July 19, 2024

Is Your Portfolio Prepared for the Next Rate Cut? BlackRock’s Advice on What to Do Now

As global financial landscapes continue to shift, BlackRock advises investors holding liquid assets to consider reallocating to bonds. With bond markets experiencing volatility amidst ongoing interest rate uncertainties and Federal Reserve policy adjustments, now appears an opportune moment for such a strategic move. Recent market activities underscored this perspective as the 10-year Treasury yield fell below 4.5% following unexpected economic data that indicated slower jobs growth and a slight increase in unemployment in April.

BlackRock’s recent findings suggest that the yields available today are particularly attractive, citing levels that are the highest observed in two decades. For example, the Markit iBoxx USD Liquid Investment Grade Index reported a yield of 5.3% as of March 2024, a significant increase from previous years. Steve Laipply, the global co-head of iShares fixed income ETFs at BlackRock, emphasized the importance of not attempting to time the market. He noted that historical trends show the difficulty in predicting the peak of interest rates, and waiting for clearer signals could lead investors to miss out on securing advantageous yields.

According to BlackRock’s analysis, the Federal Reserve has maintained the interest rates since July 2023, with no changes following the latest Fed meeting. Despite this, market anticipations lean towards potential rate reductions by the year’s end, beginning possibly in September. During periods when rates are held steady, bond investments have traditionally seen the strongest performances. Laipply advised investors to consider dollar-cost averaging to enhance their fixed income positions gradually, as many are currently under-allocated in this asset class, holding an average of only 19% in bonds.

Investors contemplating how to increase their bond holdings have various options. Choosing between individual bonds and bond funds largely depends on personal investment strategies and goals. BlackRock recommends a balanced approach, including both passive and active fund management. For those seeking broad exposure to U.S. investment-grade bonds, BlackRock highlights its iShares Core U.S. Aggregate Bond ETF (AGG), which offers a yield of 4.81% and an expense ratio of 0.03%. For diversified exposure, including higher-yielding bonds, the iShares Core Total USD Bond Market ETF (IUSB) presents a yield of 5.12% and an expense ratio of 0.06%. For more tailored investments, the actively managed Flexible Income ETF (BINC) is also available, with a 30-day SEC yield of 6% and a net expense ratio of 0.4%.

In conclusion, the current financial environment, characterized by high yields and market volatility, presents a strategic opportunity for investors to reevaluate their portfolios, especially in terms of fixed income investments. BlackRock’s insights suggest that moving into bonds now could offer significant returns, especially in a landscape where interest rates are poised to adjust. Investors are encouraged to assess their positions and consider increasing their bond allocations using a thoughtful, gradual approach to investment.

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