Fixed income: the future is NEAR

Key takeaways

• Investors looking to shift away from cash and money markets can seek elevated short duration fixed income yields without sacrificing too much liquidity.
• The elevated level of front-end rates means that investors focused on capital preservation can earn attractive income without taking on significant duration or credit risk.
• An active approach to short duration investments offers benefits such as diversification, sector rotation, and tactical duration management.

The future is NEAR

We believe many advisors could be overweight short-term fixed income assets and cash. It’s not hard to see why: likely elevated yields and low volatility. While we agree that there is a benefit to having an allocation in the front end of the curve, we believe the opportunity in the front end can be enhanced by taking an active approach and extending duration slightly to the short duration space.

As growth slows, a modest duration hedge is warranted

While cash investments have been a sound choice in an environment of rising rates, the underlying economic backdrop may be shifting. It’s our view and that of most economic observers, that growth will slow modestly towards trend (Chart 1). BlackRock’s Short Duration Portfolio Management team thinks that this opens up the door for the Federal Reserve (Fed) to begin trimming the policy rate later this year. Declining rates could be a tailwind for shorter duration assets from a price return perspective, providing a modest portfolio ballast.

Chart 1: Slowing growth argues for some modest duration exposure

Quarterly annualized US real GDP growth, actual and forecast (dotted)

Step out of cash, but don’t leap

With growth slowing, we think some investors are shifting to longer-duration exposures hoping to capitalize on a potential market downturn. But the future has proven hard to predict. For example, shorter duration fixed income exposures have outperformed the US Aggregate Index (Agg) so far this year as growth has been resilient and inflation much sticker than expected (Chart 2).

For advisors ready to move beyond cash, short-term fixed income may present a compelling opportunity. A slight extension in duration can help reduce the reinvestment risk of cash, while providing some diversification to riskier assets in portfolios. Importantly, by limiting duration, investors can seek higher rates without sacrificing too much liquidity.

Chart 2: Keeping duration low has paid off this year

Seek diversified total return

A key benefit of stepping out of cash and into short duration is the ability to seek diverse drivers of performance rather than just the singular yield of cash. The front-end of fixed income has a vast set of asset class investment opportunities, including corporate bonds, asset backed securities, collateralized loan obligations (CLOs), floating rate bonds, Emerging Markets debt and other exposures. With the diversity of asset classes, we believe an actively managed approach makes the most sense in this part of the curve.

The BlackRock Short Duration Bond ETF “NEAR,” follows an active and diversified approach, allowing access to a broad range of investment opportunities while maintaining an effective duration less than 3 years (Chart 3). NEAR’s strategy is focused on the front-end, aiming for diverse performance through security selection, active sector rotation, spread compression, duration tilts, and coupon income.

Chart 3: Fixed income holdings of NEAR are diverse

We think that this active approach is well suited to the current macro environment of an inverted yield curve, tight credit spreads, and a data-dependent Fed. For example, even with the Fed policy rate on hold since July of last year, the opportunity set to tactically shift duration exposure has proven robust, as markets repriced the Fed policy path several times (Chart 4).

Chart 4: Fed uncertainty creates opportunities for duration tilts

Attractive yield while keeping risks contained

For advisors considering extending duration in portfolios, NEAR presents a compelling option in the fixed income space. Its diversified and flexible strategy has proven effective in delivering an attractive yield per unit of risk (Chart 5). Additionally, for those seeking a tax-advantaged solution, the BlackRock Short Maturity Municipal Bond ETF (MEAR) offers a complementary option, pursuing income exempt from US federal income taxes.

In conclusion, short duration fixed income emerges as a solid choice for investors transitioning from excess cash. It can offer a blend of income potential and capital preservation, without the added risks of longer-duration exposure. The active management approach of NEAR allows investors to get exposure to the space, while taking a strategic and responsive approach to an ever-changing economic landscape.

Chart 5: NEAR has offered a competitive yield with less volatility than many fixed income assets

Percentage (%)

Standardized performance as of 5/31/2024

The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by visiting www.iShares.com or www.blackrock.com. 

Shares of ETFs are bought and sold at market price (not NAV) and are not individually redeemed from the fund. Any applicable brokerage commissions will reduce returns. Beginning August 10, 2020, market price returns for BlackRock and iShares ETFs are calculated using the closing price and account for distributions from the fund. Prior to August 10, 2020, market price returns for BlackRock and iShares ETFs were calculated using the midpoint price and accounted for distributions from the fund. The midpoint is the average of the bid/ask prices at 4:00 PM ET (when NAV is normally determined for most ETFs). The returns shown do not represent the returns you would receive if you traded shares at other times.