WHEN CASH IS KING, BONDS STILL RULE

Despite three rate cuts since the Fed started easing in September last year, investors have continued to stay on the sidelines with cash as rates remain at decade-high levels. Over USD 7 trillion currently sit in cash, and money market funds have seen more inflows than equities and fixed income over the last three years. Yet, when cash is king, bonds eventually still rule in an easing cycle, and investors could stand to benefit from taking the opportunity to put cash to work with fixed income. This month, we highlight three potential options investors can consider ahead of further rate cuts, ranging from vanilla to more niche exposures.

0-3 month US Treasuries remain the simplest way for investors to step out of cash while staying “risk free”. Short duration US Treasuries have accounted for over 85% of inflows to US Treasury ETFs within the iShares range year to date. In particular, the top flow gatherer across all bond ETFs globally by far this year has been the 0-3 month US Treasury ETF, with over USD 25B in inflows. Today, the T-bill exposure offers an attractive yield of 4.3%, giving investors a pickup over cash.

With yields still at decade-highs, target maturity ETFs offer the opportunity to secure attractive income and reduce reinvestment risk for up to 10 years before rates continue to fall. Designed to mature like a bond in a defined year, short duration iBonds ETFs allow investors to “lock in” annualized yields of 4.1% to 4.3% in USD IG over a 2 to 4 year investment horizon, through an ETF vehicle offering intraday liquidity and holding a diversified pool of hundreds of bonds in each fund.

For investors looking to stay in minimal duration yet maximise income, AAA CLOs present a compelling opportunity for uncorrelated returns while maintaining a low risk profile. A traditionally niche exposure to the broader investor base, AAA CLO ETFs now offer liquid access to the asset class yielding 5.6%, while the floating rate nature allows investors to ride the remaining wave of income before rates fall from elevated levels. Read more about AAA CLOs here.

Within fixed income ETFs, investors today have a full spectrum of strategies to put cash to work, depending on differing liquidity, risk and return profiles. This ranges from new innovations such as money market ETFs offering similar exposure to money market funds in an ETF wrapper, target maturity iBonds ETFs, short duration bond ETFs for a yield pickup while extending slightly into duration, to higher yielding exposures that are traditionally harder to access for the broader investor base.