The bond market has surged back after a tough 2022, and in spite of the uncertainty about interest rates, many top bond investors are optimistic about bonds’ future, reports an article in Barron’s. Even with high inflation, the threat of a recession, and political tensions both at home and abroad, “this is as good as it gets for fixed income,” Rick Rieder, CIO for global fixed income at BlackRock, told the crowd at the recent Morningstar Investment Conference in Chicago.
Rieder highlighted a sample portfolio with a variety of investments, including securities yielding close to 6% “with no risk”—a scenario Rieder called “nirvana.” The securities ranged from commercial paper yielding 5.75% for 9-months to 1-year, collateralized loan obligations (CLOs) with a 5.8% yield, and U.S. investment-grade corporate bonds with a 3-year maturity yielding 5.23%. While commercial paper, a short-term fixed-income security, is generally only sold to institutions and corporations, it’s accessible to retail investors through ETFs such as BlackRock’s Ultra Short-Term Bond, which has a 26% of its holdings in commercial paper and is up 0.5% so far this year. Likewise, CLOs are available to retail investors through ETFs like the Janus Henderson AAA CLO ETF, which has climbed 0.7% in 2023, according to the article.
Meanwhile, co-CIO and fixed income manager at Baird Advisors Mary Ellen Stanek told Barron’s in an interview that even with any market volatility on the horizon, fixed income is a safe bet, and there is an opportunity to create a portfolio that can withstand the turmoil. Stanek pointed to Baird’s Core Plus Bond Fund, which takes the long view and tries to outperform the total return of the Bloomberg U.S. Universal Bond index with a blend of mortgage-backed securities, corporate debt and U.S. government debt that shifts over time. Municipal bonds are also very much in the mix, as they’ve rebounded this year after a dismal 2022, and might be of particular interest to investors in high tax brackets because their interest is typically exempt from state and federal taxes. Indeed, Baird’s high-duration municipal bond fund holds a gold rating from Morningstar and ranks in the top 4% of its category for its 3-year performance. Another gold-rated fund is the Fidelity Tax-Free Bond, which has an attractive expense ratio of 0.25%, though the article suggests using FINRA’s Fund analyzer to determine how much of a bite a mutual funds’ fees will take out of investor returns.
And it’s not just BlackRock and Baird who are enthusiastic about bonds; the most recent Big Money poll from Barron’s indicated that 52% of managers are taking a bullish stance on bonds, with expectations that they’ll return more than stocks this year. Treasuries were the first choice of almost half of the poll’s respondents, with U.S. investment-grade corporate bonds coming in second.