It’s not the best time to own bonds, but time to shore up cash buffers. Those are sentiments echoed by the head of BlackRock’s $2 trillion fixed-income division Rick Rieder. The world of depressed interest rates means the risk-reward in the fixed income sector, especially bonds is not the best for income-focused investors.
Cash Over Bonds
Likewise, by shoring up cash buffers, investors should be able to pounce on bargains once they come into play. The remarks do not come as a surprise as the bond market has taken a significant hit in 2020 in the wake of central banks worldwide cutting interest rates to record lows.
Subjected to record low interest rates, treasury’s have offered meager yields, with the market outlook remaining uncertain as the FEDis yet to hint at raising interest rates anytime soon. The covid-19 situation getting out of hand all but continues to exacerbate the risk of interest rates remaining at record lows much longer, conversely lower yields in the bond markets.
Rieder does not expect any sell-off to come into play in the bond market next year. However, the continued lack of yield should translate to an increased risk of holding short term treasury yields. Similarly, an investor should not go all out and start ditching bonds. Instead, focus should be on accumulating a substantial amount of cash and wait for investment opportunities to crop up.
Holding a significant amount of cash in a portfolio should accord investors the flexibility of jumping into any opportunity on the market dipping. With the stock market still flirting with record highs waiting for pullbacks would be an ideal call.
The remarks come hot on the treasury yields remaining flat on the heels of Congress passing a $900 billion COVID-19 relief package. The 10-year Treasury yield was little changed at 0.935%, having struggled to rise past the 1% mark in recent months. The 30-year Treasury bond, on the other hand, dipped to 1.671%.
Sentiments in the bond markets remain suppressed in the wake of growing concerns about a new coronavirus strain that is 70% more transmissible. The strain has already caused a number of countries to shut their borders to Britain.
With Britain inching closer to tighter restrictions to curb the spread of the highly transmissible strain, there is growing concerns over the risks of the strain getting its way into other countries already struggling with a second wave of infections? Investors are also keeping an eye on the distribution of the Pfizer and Moderna vaccines in the hope they will help avert further deterioration of the situation.
Corporate Bond ETF
Amid the low yield environment in the bond market, now may be the best time to take a keen interest in corporate bond ETF. Such securities are ideal for investors not looking at what gains a fund is likely to provide but rather the price for gaining performance or exposure.
IShares Short-Term Corporate Bond ETF would be an ideal pick for investors looking to keep their duration risk short at a low cost. The corporate bond ETF comes with a low 0.06% expense ratio and tracks the results of the ICE BofA 1-5 Year U.S Corporate Index.