As British film legend Laurence Olivier’s Dr. Szell repeatedly asked Dustin Hoffman’s Babe Levy in “Marathon Man,” bond investors may be wondering, “is it safe?”
Investors may feel like the victim in Dr. Szell’s chair after last year clocked the worst bond market in centuries, slashing portfolio values and stranding investors without safe havens from plummeting stock markets.
The twin assault of rising interest rates and inflation pummeled fixed income, pushing the iShares Core U.S. Aggregate Bond ETF (AGG), which tracks the Bloomberg Aggregate U.S. Bond Index, down a record 13%. Long-term bonds had it worse than short-term ones, as the highest inflation in 40 years chipped away at prices.
The Federal Reserve’s aggressive interest rate hikes—to around 4.5% now from about 0% at the start of last year—have helped slow inflation to 6.5% from 9.1% in June. The Fed is now aiming for 2% to help the U.S. economy avoid a recession.
Those rate hikes have meant a reversal in the bond market and for financial advisors; bond fund inflows surged in January to $20.8 billion from $16 billion in December. The time to add bond ETFs to client portfolios has arrived.
“Bonds are a talking point again because we’re able to generate some income and it’s palatable,” Kevin Simpson, founder and chief investment officer of Capital Wealth Planning in Naples, Florida, and host of a popular YouTube channel, told ETF.com. “If you can get 3% to 4% in a bond ETF, it probably makes sense to have an allocation to bonds.”
Since the market environment has changed since last year, financial advisor Tom Balcom, founder of 1650 Wealth Management in Lauderdale-By-The-Sea, Florida says he’s choosing the JPMorgan Ultra-Short Income ETF (JPST) and the WisdomTree Floating Rate Treasury Fund (USFR) for clients.
“Bonds are back, baby!” Balcom wrote in a recent note to clients, adding that “bonds have once again become ‘reasonable alternatives’ as an investment.”
Of JPST, he told ETF.com, “Those are good buffers in the portfolio; short duration bond ETFs with a nice healthy yield, higher than cash.”
For rising interest rates, Nicholas Bunio, financial planner and owner of Bunio Consulting in Berwyn, Pennsylvania, is also recommending an ultra-short bond fund, the Vanguard Ultra-Short Bond ETF (VUSB). He said his clients are mostly 50 years and older, and the fund works well for their needs for “diversification, liquidity and principal protection.”
“It's a really stable bond fund with very short-term bonds,” Bunio said. “It's nice for rising interest rates.”
When interest rates fell to around 0% in the early days of the pandemic, Jason Siperstein said his firm looked at them as “return-free risk” rather than “risk-free return.”
“Today, however, it’s a totally different environment: T-bills are yielding over 4%,” Siperstein, president of Eliot Rose Wealth Management in East Greenwich, Rhode Island, wrote in an email. He remains cautious: “Even though inflation seems to be coming down, we aren’t out of the woods yet.”
He's putting clients into the iShares iBonds Dec 2023 Term Corporate ETF (IBDO) and the iShares iBonds Dec 2023 Term Treasury ETF (IBTD). Inflows into both funds have surged recently.
Contact Ron Day at [email protected]