Article by Vasiliki Pachatouridi, director, head of EMEA iShares fixed income strategy and systematic fixed income product strategy team, iShares
Capital at risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount they originally invested.
Are bonds the opportunity you can’t afford to miss right now?
Inflation indicators are starting to cool, several central banks have already cut rates – but bond yields are still higher than they’ve been in a decade.
Early movers started their shift back to bonds last year, propelling global bond ETF inflows to a record $333 billion in 2023.[1] But many investors are still significantly underweight bonds, with an average EMEA allocation of just 25%.[2] There’s still a long way to go.
Markets tend to price in the future before it happens. So, with the bond market regaining momentum, should you be jumping back in now?
Why Bonds? Why Now?
There are several good reasons to consider bonds right now.
Inflation is way down from its peak, and despite an uneven descent with the occasional bounce upwards, it no longer feels untameable.
Falling inflation means the world’s major central banks have probably reached the end of their aggressive rate-hiking—a cycle that made cash king for a time.
Central banks will inevitably take us back to a less restrictive monetary environment when they can, while the European Central Bank, the Bank of England and the Federal Reserve, have all started cutting rates already.
Setting aside the exact timing of future rate cuts, the bottom line is this: current bond yields offer potential opportunity to get in ahead of change. Yields tend to fall alongside or ahead of rate cuts – but volatile data have kept them higher than we might expect. So, while rates are clearly trending downwards, inflation’s uneven descent has provided a potentially attractive entry point for bond investors.
Ready to rethink your portfolio?
Over the past few years, market volatility drove many investors to the safety of cash and cash-like investments.
As interest rates rose rapidly in 2022 and 2023, cash seemed like a smart play. T-Bill yields soared to around 5.25%, and Euro Short-Term Rates neared 4%.[3] UK savers could easily find rates above 5%.
The flows showed clear evidence of a flight to safety: over $1 trillion poured into money market funds worldwide in 2023. By year-end, assets in these funds had hit $9.2 trillion, up 19% from the previous year.[4]
While cash has become an asset class on its own, it plays a different role in portfolios to bonds. Bonds have long played two key roles in a balanced portfolio: generating income and offering diversifications against other riskier assets. And with cash yields falling already, that income and diversification power is looking more attractive.
How to Get Back Into Bonds
One of the most effective ways could be with a bond ETF.
These funds offer a versatile and efficient way to gain exposure to everything the bond market has to offer, from broad-based exposures to much more targeted ones.
Bond ETFs have become the go-to strategy for investors. As of July 2023, they had over $2 trillion in assets – and we believe that could triple to $6 trillion by 2030.[5]
Why? Because these ETFs offer a cost-effective combination of precision, liquidity, and transparency.
Bond ETFs Are Hard to Beat
Whether deploying cash or rebalancing your portfolio, bond ETFs offer several key advantages:
Efficiency and Liquidity. They let you buy and sell portfolios of thousands of bonds with a single trade, making them a powerful tool for managing fixed income exposure in a portfolio. And they often trade at a fraction of the cost of individual bonds.
Diversification and Customisation. With over 2300 bond ETFs on offer, you have more choices than ever.[6] Whether you’re looking to invest in sovereign bonds, corporate bonds, or emerging market debt, there will be an ETF for you. You can build a broad portfolio with aggregate bond ETFs or customise your exposure across sectors, maturities, and credit ratings.
Innovation. Bond ETFs are constantly evolving. Take iBonds® ETFs, for example. They trade like a stock, diversify like a fund, and mature like an individual bond. They are a unique way to lock in yields in your portfolio.
Advanced Portfolio Construction. Newer bond ETFs are also slicing the fixed income market more precisely, allowing for highly customisable portfolios. Hitherto institutional-only strategies are now accessible to everyone, enabling many more investors to build portfolios capable of weathering various market conditions.
Bottom Line: Lock In Yields with Bond ETFs
The bond market has undergone a dizzying transformation in recent years—buffeted by high global inflation and aggressive central bank tightening.
There may be a case for moving off the sidelines and back into bonds. The high-yield environment presents an opportunity to lock in income levels.
Bond ETFs offer a powerful toolkit to navigate the new market regime. Whether you’re looking to deploy cash or rebalance your portfolio, bond ETFs offer the flexibility, and efficiency needed to achieve your investment goals.
Risk Warnings
Capital at risk.
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The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.
Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.
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[1] BlackRock Global Business Intelligence, as of 31 Dec 2023
[2] Broadridge for Mutual Fund data, GBI iShares for ETFs, as of 31 Jan 2024, and Hedge Fund Research (HFR) for Global Hedge Funds as of 31 Dec 2023. Closed ended funds excluded.
[3] Bloomberg, based on Bloomberg Barclays US Treasury Bill Index and EURIBOR 1 month, as of 29 Feb 2024
[4] Simfund for US money market funds; Broadridge for non-US money market funds, both as of 31 Dec 2023
[5] From proprietary research. BlackRock projections as of 31 March 2024. Subject to change. The figures are for illustrative purposes only and there is no guarantee the projections will come to pass
[6] BlackRock Global Business Intelligence, total number of bond ETFs globally is 2,392, as of 31 March 2024
