BOND ETFS FOR EVERY SCENARIO

In our latest whitepaper “No Time to Yield”, we underscore that rather than waiting for a clear direction on rate cuts, investors should put cash to work with bond ETFs. This month, we explore different exposures that investors can turn to depending on their view of the markets and which portfolio outcome they seek, using three scenarios.

Scenario 1: Central banks engineer a soft landing

What exposures can investors use?

Investors can consider balancing the belly of the curve with high-quality, longer-duration bonds and higher income asset classes. Intermediate duration exposures may offer a good trade-off between current yield and potential upside valuation gains as rates fall. For investors seeking higher income, high yield credit and other risk assets could become much more attractive with lower refinancing risk and positive economic growth helping to contain default risk.

Scenario 2: Central banks cut rates given fears of recession

What exposures can investors use?

While short-term rates are high, cash will not provide the same ballast as bonds. Such a scenario could harm risk assets and has historically triggered a flight to quality in which the long maturity instruments typically benefit from falling yields. Investors can consider “barbelling” their current cash allocation with long duration instruments to help cushion risk assets and provide equity diversification. Investors may consider holding high quality assets like government bonds and higher quality credit exposures.

Scenario 3: Central banks hike again

What exposures can investors use?

Investors may want to continue owning shorter maturity instruments, which may help insulate from further policy rate increase and stickier inflation. With current inverted yield curves, shorter-duration maturities could offer attractive yields versus cash and could support those seeking capital preservation. Investors may also consider holding high quality assets like US Treasuries and higher quality credit exposures.