There is more to juicing yield than hiding out in money market funds, and BlackRock says now is the time to hop into high-quality fixed income. The asset manager recently issued its iShares 2023 midyear outlook, noting that as interest rates remain higher for longer , it makes sense for investors to step out of cash and toward other opportunities. Indeed, the combination of higher interest rates and an inverted yield curve has made money market funds and Treasury bills tempting. A 3-month T-bill is yielding 5.3%, while the Crane 100 Money Fund Index has an annualized seven-day current yield of 4.94% as of June 29. US3M US6M 1Y mountain Short-term T-bill rates have ticked higher “Holding too much cash can leave investors at risk of missing out on bond or stock market rallies,” the firm noted in its report earlier this week. “As rates appear set to peak with the approaching end of the Fed’s hiking cycle, investors may want to consider stepping into high-quality, medium-term fixed income.” BlackRock is highlighting bonds with maturities between three years and seven years. The firm noted that between 1990 and February 2023, “core bond exposures performed 4% better than cash equivalents” when the Federal Reserve held rates steady or cut them. The firm also noted that even if the central bank were to boost rates higher than current market expectations, “the carry earned from higher coupons can be sufficient to counter losses realized by rising rates.” Bond yields move inversely to their prices. Further, the prices on longer-dated bonds are more sensitive to a changing interest rate environment. Some investors are starting to turn toward longer maturity. BlackRock noted that intermediate and long-term fixed income exchange-traded funds have received $27.6 billion in inflows year to date, 15% greater than the amount of cash hitting their short-term counterparts. For those who want to squeeze some more yield and take a little risk, BlackRock recommends emerging market local currency bonds, which are offering a yield of 7.7% on a weighted average coupon of 5.9%. “At these levels, we believe investors are adequately compensated for long-term inflationary risk, given many EM central banks target ~3% inflation,” the firm noted.
Here’s the next yield play for fixed income as rates peak, according to BlackRock
