‘The Fed hasn’t signaled that they’re done,’ strategist says

Blackrock Global Co-Head of Fixed Income ETFs Steve Laipply joins Yahoo Finance Live to discuss the bond market, investor sentiment, interest rate volatility, Fed policy, and the impact of stress in the global banking sector.

Video Transcript

- Sticking with bonds, our last guest noted the bond market signaled a more risk-off approach in tech, but what about opportunities in fixed income? Interest rates are higher than they've been in years, giving investors the chance to retool and de-risk. For more on the opportunities in the bond market, let's get to BlackRock Global Co-Head of Fixed Income ETFs, Steve Laipply.

Steve, thank you for joining me. So a lot of people wondering how to play the bond market right now. Obviously, we're seeing these inflows into these shorter-term yields.

STEVE LAIPPLY: Yeah, so there are a number of ways that you can get back into fixed income. We think it is a generational opportunity. Some investors have never seen yields this high in their investing careers, if you think about investors who are newer to the market.

So playing the short end is a good, safe way to do it. You have things like shorter-term T-bills and Treasury floaters that are yielding, you know, over 4.5%. We do see investors actually going into the long end, however, which is very interesting.

So just year-to-date, we've taken in 22 billion. Most of that is actually in our Treasury suite. And what's interesting about that is investors seem to be diversifying their bets. So a lot of that's on the front end, but it's also on the back end, as well, which is something I think might surprise people, just given the fact that the Fed hasn't signaled that they're done.

- Right. So I mean, with that in mind, we're not exactly sure if we're going to have a pause, perhaps another rate hike higher than the 25 basis points. There's still a lot of uncertainty there. So then where is the smart place when it comes to bond ETFs for people who want to get in, take advantage of these yields, but really aren't sure how to approach it?

STEVE LAIPPLY: I think the shorter end still makes a lot of sense. You know, I mentioned the Treasury floaters. That's a great way to get yield while minimizing your duration risk at the same time. So for an investor who really hasn't settled on a view, that's a nice way to do it, because then you're able to earn some income. You're not taking a lot of interest rate risk in the process.

- And obviously, we've seen a lot of global stress, especially on the banking sector. How much is that affecting how people are investing, where the flows are going?

STEVE LAIPPLY: Well, the volatility obviously has really spiked because of the banking episode. We saw Treasury volatility hit levels that it hasn't hit since the financial crisis. And I think in response, what you saw was a surge in volumes of Treasury ETF trading.

So we saw volumes, I want to say, three times the normal average for Treasury ETFs. Our entire suite saw elevated volumes. And for us, that is something that we see a lot with bond ETFs. Whenever there are stressed markets, investors actually tend to pivot towards those products because of their liquidity. They're easy to trade. And so it wasn't surprising to see Treasuries get that much interest as a result of all this volatility.

- And so for people taking a longer-term view, then, obviously at some point we're expecting a Fed pause and a pivot. How should they adjust their portfolio to sort of account for that, as well?

STEVE LAIPPLY: At that point, I think investors will start allocating in a more traditional way. So they'll start buying broad, multisector fixed income, which allocates to Treasuries, to investment-grade, to mortgages, things like that. They'll want to be diversified versus what they're holding in the equity part of their portfolio, and they probably will want to not concentrate their positions in any one sector. So I would expect them to shift from the short end of the curve further out and then broaden out their allocations.

- And what do you see as potential risks to these bond ETFs?

STEVE LAIPPLY: I think bond ETFs hold bonds, and so you have to think of them very much in the same way you would view bond risk. So are you worried about interest rates going up? Are you worried about credit?

The bond ETF itself has tremendous utility, in terms of trading and being able to move efficiently in markets. So again, typically, in these stressed periods, while the underlying market may run into challenges liquidity-wise, almost every single time, we see bond ETF volumes accelerate very, very sharply. So that in and of itself has tremendous value for investors who are trying to navigate the market.

- And what's your take on international exposure to bonds at the moment? Obviously, we're still sort of seeing what's happening with China, with Europe, as well. How are you seeing that landscape?

STEVE LAIPPLY: So we-- up to this point, we have not seen a huge amount of flows going back into, for example, emerging markets. We're starting to see some of that happening, but it's a little bit choppy. I do think investors, you know, once they have a view on where the Fed is going and what their sort of landing place is, I do think you'll start seeing-- you know, I mentioned diversifying allocations. That will include international and EM, as well.

- Well, certainly a lot to keep hold of. Fixed income still the play right now, especially with a lot of volatility. We don't know how long it's going to last. A pleasure having you there, BlackRock Global Co-Head of Fixed Income ETFs, Steve Laipply. Great to have you with us in studio.