Yields are rising again and rate hikes are likely to continue. Analysts say this means it’s a good time for investors to put their money into bonds or government bonds — especially those with the shortest durations. BlackRock said in a note on Tuesday that it believes the Federal Reserve will continue to stabilize inflation in “a considered and determined manner” and that its war on inflation does not mean it will “unnecessarily create a recession.” “The pace of price increases priced in by the market over the next 6 months seems somewhat excessive to us, and we believe this creates opportunities in front-end government and investment-grade corporate bonds,” said Gargi Chaudhuri, Head of Investment Strategy iShares at BlackRock the Americans. “In addition to absolute yield levels we haven’t seen in years, bonds could now offer more ballast against volatile equity positions – an added boon in the event of a recession,” she added. Yields rose again on Wednesday and the 10-year Treasury bond rose to its highest level since July 2008 at 4.136. 2-year government bonds also rose to 4.55%. The 10-year was up 4.176% last Thursday during Asian Hours and the 2-year was up 4.6%. In a note last week, Wells Fargo suggested that investors should take advantage of this small window of opportunity. “For investors, the sharp rise in short-term yields has important implications and has created near-term opportunities not seen in over two decades,” said Brian Rehling, Head of Global Fixed Income Strategy. “Unfortunately, the nature of short-term maturities implies that these opportunities can be relatively short-lived.” What to buy BlackRock said it expects the Fed to keep interest rates “higher for longer” even amid recession risks. As markets approach “maximum interest rate pessimism,” BlackRock said it sees opportunity in this short-duration fund: iShares Short Treasury Bond ETF: It consists of bonds that mature in less than a year. iShares 0-5 Year TIPS Bond ETF: It has exposure to short-dated US Treasury Inflation-Protected Securities (TIPS). iShares 1-5 Year Investment Grade Corporate Bond ETF: It has exposure to US corporate bonds with maturities between one and five years. “We also expect the Fed to be ‘higher for longer,’ so we expect the opportunity to extend further out of the curve as well,” said BlackRock’s Chaudhuri. Overall, she said, short-duration bonds look best through the end of the year. Earlier this week, Goldman Sachs also said it was overweight cash and favored near-term more defensive real assets like TIPS. Wells Fargo was the most bullish on US Short Term Taxable Fixed Income, adding that short-term interest rates could remain attractive over the next six months. “It is evident that the Fed controls the direction of near-term interest rate movements,” it said. “Short-dated maturities, with maturities of 6 to 12 months, anticipate Fed interest rate moves.” BlackRock’s US Short Term Taxable Fixed Income sample portfolio on its website as of October 3 showed a mix of holdings. They include: A mix of Treasury bills with coupons up to 3% and maturing in 2023-2026. Bonds issued by US investment banks, technology companies and others with coupons up to more than 4% and maturing in 2023-2026.
