BACK TO SCHOOL: A BRIEF HISTORY OF RATES

Back to School: A Brief History of Rates
The Global Treasury Index has been a key building block of the Global Agg since the creation of the Global Aggregate Index in 1999, with the exposure currently representing over 50% of the Global Agg. This month, we break down all you need to know about the exposure, and the range of ETFs investors can access it with today.

Back to basics, bonds as equity diversifiers
Bonds have traditionally played the role of an equity diversifier due to their negative correlation to stocks. While the correlation has turned more positive in recent years, amidst 2024’s broad reallocation to fixed income, this sought-after feature returned in August, as bonds, notably rates exposures, provided portfolio ballast as stocks sold off.

Specifically, government bond ETFs have spearheaded the momentum back into fixed income with ~$90B inflows YTD (30% of industry-wide bond ETF flows). Investors today have more options than ever, from one-ticker solutions for global government bond exposures, to more granular expressions.

How much has currency movements affected returns?
Historical performance of the Global Treasury Index has shown that currency movements can introduce volatility in returns. For a USD-based investor, a USD-hedged ETF share class can help to protect against FX risk and currency fluctuations. At the same time, the higher rates environment in the US relative to most of the other markets in the index means that hedging foreign currency exposures back to USD currently offers a yield pick-up.

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.