Favor longer-dated Treasuries. The 10-year Treasury yield still appears attractive relative to sovereign rates elsewhere in the world. In addition, longer-dated Treasuries also look more attractive than those with two- to five-year durations, which are likely to exhibit the most volatility and be most vulnerable to rising rates.
Go for high yield bonds. The 10-year Treasury yield’s recent move has high yield bonds looking more attractive on a relative basis. Earlier in the year, high yield levels sat at 5% vs. 2.5% for the 10-year Treasury. That relationship has changed to nearly 6.5% for high yield vs. 2% for the 10-year Treasury. As such, high yield bonds offer a better value, particularly as high yield defaults should remain muted for the time being.
Consider long-end municipal debt. While munis are no longer cheap on an absolute basis, they remain relatively attractive, especially long-end muni bonds. Plus, the sector looks compelling given improving issuer credit conditions and higher tax revenues.
Overweight mortgage-backed securities. Select commercial mortgage-backed securities and non-agency mortgages continue to look attractive given today’s low-rate environment.
Don’t forget total return-oriented and opportunistic strategies. Given the likelihood of more volatility ahead as rates normalize, investors should consider allocating at least a portion of their fixed income portfolios to balanced approaches, as well as to flexible, go-anywhere investing strategies that look for opportunities across a wide set of asset classes and global markets, adjusting duration and rate exposure as needed. Such investing approaches can potentially help investors mitigate interest rate risk and protect against market shocks.
For more on what this week’s market moves mean for portfolios, check out my colleague Russ Koesterich’s recent post on whether equities are entering a bear market.
Sources: BlackRock, Bloomberg.
Rick Rieder, Managing Director, is BlackRock’s Chief Investment Officer of Fundamental Fixed Income, is Co-head of Americas Fixed Income, and is a regular contributor to The Blog. You can find more of his posts here.