BlackRock's BINC Pulling in Cash as Yields Rise

With long-term U.S. interest rates at their highest level since 2007 and the short-term fed-funds rate at 5.375%, fixed-income investment products have become much more attractive. 

The BlackRock Flexible Income ETF (BINC) is receiving a lot of attention. In September, etf.com published an article by Lucy Brewster saying that BlackRock was “tapping into increasing investor demand for actively managed funds.”  

BINC provides investors with an actively managed approach to multisector global fixed-income exposure. The fund invests in corporate bonds, government and municipal debt, securitized assets, floating-rate loans, money-market securities, collateralized debt obligations and preferred stocks. While BINC holds high-yield securities, it may hold up to 20% of its portfolio in investment-grade bonds.  

The ETF was listed in late May. At $50.55 per share on Nov. 3, BINC had over $182.4 million in assets under management. It trades an average of 53,333 shares daily and charges a 0.40% management fee.   

High Rates 

In October, the U.S. 30-year Treasury bond futures fell to their lowest level in 16 years at 107-04. Meanwhile, the yield on 10-year Treasuries rose above the 5% level. Holding a 10-year Treasury until maturity at the 5% level yields a 62% return. 

The highest interest rates in years have choked demand for new mortgages, but they have sparked a buying opportunity for bond investors with a long-term investment horizon. Juicy returns without stock market volatility has made a comeback.   

Search for Safety 

Markets reflect the economic and geopolitical landscapes. As the highest inflation in decades continues to erode the value of money, the Federal Reserve’s hawkish monetary policy path since early 2022 has also periodically weighed on the stock market. 

Meanwhile, wars in Ukraine and the Middle East have increased uncertainty. The sharp decline in the bond market, however, creates a resurgence in tucking away capital in assets that will provide the highest low risk yields in decades.  

Mark-to-Market Risks 

The leading risk in the bond market is the mark-to-market factor, which can cause more than a bit of indigestion when investors receive their monthly or quarterly statements. Rising interest rates and falling bond prices lead to losses on fixed-income securities. However, investors with a long-term horizon who hold these assets to maturity realize the total value and interest flows.  

The regional bank failures earlier this year resulted from withdrawals from institutions that didn't have enough cash on hand. Investments in long-term fixed-income assets suffering mark-to-market losses forced the failed institutions to liquidate the securities early, locking in losses and creating insufficient funding to meet the withdrawals. 

Aggressive factional investing with a deposit base and questionable regulatory supervision caused the failures. A falling bond market requires stricter attention to portfolio risk and hedging against further declines. Investors with a long-term approach suffer discomfort when their statements arrive, but if they hold their positions until maturity, they won't suffer losses.  

BINC’s Potential 

Properly managed, BINC and other actively managed fixed-income products should provide solid returns in the current interest rate environment. BINC aims for an average portfolio duration between one and five years. While there are no guarantees, higher rates should favor BINC investors. Moreover, if the bond market recovers from its bearish trend, market-to-market gains could provide significant capital appreciation in the liquid product. 

BINC is not a trading vehicle, but it could offer upside if the bond market rallies.

The chart shows that BINC has traded between $49.54 and $51.51 per share since May 23. The bearish trend corresponds to the bond market’s decline to over a 15-year low in October.  

Fund Flows Are Positive 

Since May 21, BINC has seen positive fund flows.  

The etf.com Fund Flows Tool shows $120.6 million flowed into BINC since late May. The positive flow occurred as rising interest rates attracted investments in fixed-income products.  

BINC investors hope that the flexible and active management of the BlackRock product will beat the average yields on one- to five-year debt securities held in its portfolio. Moreover, if the bond swoon leads to a significant upside correction, BINC could provide substantial returns.