SNAKES AND (BOND) LADDERS

Snakes and (Bond) Ladders

Fixed income markets in January could be likened to the game of snakes and ladders – while returns were broadly positive, this was not without much volatility – The Year of the Snake has so far seen strong economic data to start the year, yet Trump’s proposed policy mix of tax cuts, tariffs, and an immigration crackdown fueled expectations for higher US inflation and sparked worries for the growth picture ahead, leading the yield curve to flatten to a multi-week low. While this can be challenging for fixed income investors who are looking for stable quality income with minimal interest rate moves – this is easily solved through a diversified bond ladder strategy.

A risk-controlled approach to building bond ladders

Bond ladders can be built in many ways to meet a specific investment objective. A bond ladder allows an investor to maximize income at different points on the curve whilst managing interest rate risk nimbly. If the investor expects rates to rise, proceeds from near-term maturities in the bond ladder can be reinvested into longer-term maturities to lock in higher yields. A better solution is an optimized bond ladder across maturities – made even better with iBonds.

This offers investors the opportunity to capture the upside potential from expected (or unexpected) yield curve or spread changes. For example, if a scenario plays out where the yield curve flattens further, positioning towards the intermediate and longer end of the curve while maintaining the same portfolio risk can lead to enhanced performance (Chart 1). In any case, even if the market does not move in favour of the trade, the investor can simply hold the rungs of ladder to maturity to protect against the downside.

Source: BlackRock, Aladdin, as of 31 January 2025. There is no guarantee that stress testing will eliminate the risk of investing in this fund or strategy nor that the Profit & Loss movements depicted in the stress testing will replicate in the future. For illustrative purposes only.

No Time to Yield

A case for putting cash to work with bond ETFs

Last year, our whitepaper “The Great Yield Reset” discussed the generational opportunity for investors to rethink their portfolios with a greater focus on fixed income.

In our latest paper “No Time to Yield”, we highlight our updated expectation that global bond ETFs will reach US$6 trillion in AUM by 2030. We discuss the opportunity within bonds and why investors may want to consider moving now to capture decades high yields, get cash off the sidelines, and employ efficient, precise tools such as bond ETFs in this new market regime.

As investors take a more dynamic approach to asset allocation, we believe bond ETFs are among the most powerful tools within the investor tool kit to navigate this market environment.

The timing of potential interest rate cuts may be uneven worldwide, but the message is clear: Don’t wait.

Source: BlackRock, “No Time to Yield”, as of April 2024. There is no guarantee that any forecasts made will come to pass.

Key themes we discuss in this piece:

1. Time to put cash to work and capture higher rates Yields are higher today than they have been in years. If inflation indicators continue to fall, the time of elevated cash rates may be drawing to a close.
2. Investors are choosing bond ETFs in record numbers, but they have room to do more Many investors are still significantly underweight to fixed income, with a 22% average allocation, based on total global industry AUM, far below the “60/40” portfolio allocation often referenced in balanced portfolio discussions.
3. Now is the time to move Even with ongoing volatility in economic data and bond markets, we believe it’s time for investors to move because, historically, the market has tended to price in rate actions before they occur.

Index Your Bonds with Asia Credit

Asia bond markets definitely have a part to play in the next leg of growth in index and ETF adoption. As investors continue to move beyond the “active versus passive” debate, constant product innovation will offer increasingly precise sources of potential returns, and help lead more investors to embrace bond index building blocks alongside high conviction active strategies in pursuit of optimal portfolio outcomes.

In this Asia-focused “Index Your Bonds” paper, we spotlight iShares Asia Credit exposures, provide insights on how they are managed in practice, and discuss how innovations such as ESG integration will make indexing an integral part of investing in Asia fixed income.