Remy Blaire: In New York midday trade, we are looking at the 10 year yield hovering right below 5%.
While bonds are the single largest and most common category of fixed-income investments, a surge in global bond yields has been causing existing bond holdings to drop in market value. Long-term government bonds experienced the steepest capital losses because their coupon rates are locked in for decades.
And with a global bond market rout taking place over the past few months, the time is now for fixed-income traders to adjust.
Investors who typically adapt by shifting from 30 year to 10 year paper to one-to-three-year Treasuries, floating-rate notes or money market funds reduce price volatility while capturing high yields.
Joining me with a breakdown of how fixed-income investors can approach ETFs is Jason Bloom, Head of Fixed Income ETF Strategy for Invesco.
Jason, great to have you here. Thank you so much for joining me.
Jason Bloom: Hi, Remy. Thanks for having me.
Remy Blaire: Well, you and I were talking about where the 10 year yield is on this Monday morning as we kick off quite the eventful week here.
So give us your take on what the rate outlook means when it comes to bonds.
Jason Bloom: Well, we're in this really, I would say, unusual macro environment, at least unusual with respect to the last, call it, 15 years or so.
Maybe not that unusual if you're thinking back to when I started to cut my teeth as a bond trader back in the early 2000s and late '90s.
This environment probably looks a lot like that environment. And in fact, then you had CPI running around 3%, 3.5%, and typically the 10 year traded about 150 to 300 basis points higher than that.
So if we have CPI today around 3%, 3.5%, it kind of puts fair value for the 10 year probably somewhere between 5% and 6%.
If we were to get a pullback in inflation, then certainly you could expect some relief rally in bonds and lower yields to follow.
But from a growth perspective, you know, we have some very consistent dynamics that are driving growth, driving inflation and driving the higher yields.
And we're not in an environment where the Fed is manipulating those yields like they were for a decade.
And so we're sort of in this multiyear period of normalization, in our view. And the market appears to be pricing growth, inflation and risks appropriately.
It's just been a long time since we saw these nominal levels. And so it's shocking to some who maybe entered the market post-2011.
But from a historical perspective, I think things make a lot of sense right now.
Remy Blaire: Yeah. And Jason, indeed, when we step back, I think perspective is key here, especially when we're looking at yields on both the short end as well as the long end of the yield curve.
But when we're talking about inflation, we all know there is still plenty of uncertainty when it comes to the macro, as well as the factors, the geopolitics, that are driving this.
So for investors out there who are looking at bonds, as well as institutional clients, where do you stand?
Jason Bloom: Well, we really think the best risk-reward sits in the short end of the curve right now, simply because while we've gone up a lot at the long end, we could go further.
And that's, as you mentioned earlier, that creates a lot of volatility in the price of those bonds. And people can see a lot of red in their statement in the short term if rates were to go higher with a long-duration portfolio.
So we like things like floating-rate investment-grade credit.
So we have an ETF. The ticker is VRIG, Variable Rate Investment Grade. It's exactly what it sounds like. It's a near-zero duration.
So you take that price volatility related to interest rates away, and you're just taking investment-grade corporate credit risk.
You're getting a nice pickup in yield over cash with no duration.
Another option that people are looking at quite a bit lately is ultra-short bond ETFs, which is very high-quality investment grade.
We call it near-cash. It's not cash, but it's close. Duration of less than one, so very low sensitivity to changes in interest rates.
And again, a nice pickup in yield over sitting in a savings account or in T-bills.
And so those are two places where you can have a very high level of quality in your portfolio and eliminate the risks and the volatility that come along with gyrations in interest rates, especially if they were to move higher.
I think maybe one exposure worth mentioning, again at the front of the curve, near the front of the curve but a little further out, are variable-rate preferreds, which maybe a lot of people haven't heard of.
But it's a little bit more of an institutional-style exposure. VRP is the ETF. Very attractive yield, still an investment-grade portfolio, a little bit more volatility than you get in ultra-short or floating rate, but also a very nice diversifying portfolio.
But these are places where, again, you've seen very steady performance in a rising-rate environment. And if people are looking for that, it makes sense right now.
Remy Blaire: And you highlighted a lot of key ways that investors can get exposure here.
So finally, before I let you go, for those who want to look beyond traditional and generate income, what would you say to them?
Jason Bloom: Well, you know, as rates rise, right, valuations, the bar, the hurdle rate rises along with that.
So we're in an environment where you've got sort of almost runaway government spending that doesn't look like it's going to be reined in.
You have a historic CapEx surge that we're only about two years into five-year budgets that have been allocated.
So there's no expectation that, you know, the spending around AI infrastructure and energy infrastructure is going to fall off anytime soon.
And so we really like taking credit risk. Go out there, get exposure to the economy that's growing in a healthy way, paying you much higher yields while keeping duration short, than hiding out in long-term, long-duration, low-yielding bonds that can generate substantial losses in the short term.
It doesn't mean you shouldn't own any of those.
But from a risk-reward perspective, we think now is the time, you know, to get invested in the real economy.
Remy Blaire: Well, Jason, appreciate your time. A lot to keep our eyes on. So thank you so much for breaking all of it down, and thank you so much for sharing all of your insights.
Jason Bloom: Yeah, thanks for the time.
