Laipply acknowledges the "dramatic shift" in rate cut expectations, but believes there could be a single rate cut as soon as November. However, he notes that after that point, "it's unclear" whether any additional cuts beyond that in 2024.
Addressing the fixed-income sector, Laipply advises investors "to start moving out of cash and back into fixed income." He acknowledges that the recent Fed tightening cycle had driven investors away from the asset class, but he emphasizes that it will be "impossible for investors to time rate cuts," suggesting that it is now an opportune time to gradually reallocate to fixed income.
Laipply outlines three potential scenarios for investors to consider: For those who believe in a soft landing scenario, he recommends "moving back out into broad fixed income." For those who expect inflation to remain stubbornly high, he suggests focusing on treasury exposure and things like short-dated TIPS. For those who anticipate a hard landing, he advises longer duration fixed income assets.
JULIE HYMAN: Stocks have struggled as of late amid concerns inflation is no longer cooling. And the Federal Reserve could ease back on interest rate cuts. For more on how investors can best play the markets within fixed income amid Fed uncertainty, let's welcome in Steve Laipply, BlackRock Global Co-head of Bond ETFs. Hey, Steve, it's good to see you.
STEVE LAIPPLY: Hey, Julie. Thanks for having me.
JULIE HYMAN: So what's your base case at this point? I mean, we've got folks now sort of all over the map when it comes to how many rate cuts are expected this year.
STEVE LAIPPLY: Yeah, and you saw the dramatic shift over the last couple of months. I mean, we kind of went into last year, you know. At one point, I think we were as high as over 6 cuts.
And now we're down to under two. So depending on which way the front end of the curve is moving, you know, we're still showing a cut by November. But then after that, it's unclear if you're going to get another one going into the end of the year or early part of next year. So eventually, you know, the expectation is that policy will ease.
But that whole idea of multiple cuts this year certainly seems to have been pushed back. And Fed speakers the last few days have done nothing to dissuade anybody from thinking that.
- You know, Steve, I'm curious how investor portfolios have been challenged this year given the action we've seen both in the stock market where things have been quite buoyant. And always makes it less exciting to get 3% or 5% return on your fixed income. And also, the shifts, we've seen you mentioned the front end of the curve, the dramatic move we saw last week. How that has challenged the setup for the fixed income side of investor portfolios?
STEVE LAIPPLY: Yeah, and I think this is tricky. Because as you know, we've been vocal about starting to move off the sidelines, starting to rightsize your fixed income allocation. Most investors using our data are fairly under allocated fixed income.
And it's no surprise because, you know, we embarked on probably the strongest tightening cycle in what 40 years. So it's understandable that investors would be somewhat guarded here. But we do think that it's time to start moving out of cash and back into fixed income.
Now, yes, it's been uneven. You know, it's interesting last year is a good case in point. And so last year, going into the fall all the way up until Halloween, you had really tough sledding and fixed income, had negative returns. But by the end of the year, that had shifted dramatically.
And so what we're telling investors is that it's probably going to be almost impossible to time the peak and rates. It's time to start moving. YOU dollar cost average in stocks, you should start dollar cost averaging in bonds as well so you're set up when the economy normalizes and policy normalizes.
JULIE HYMAN: So, Steve, if people are under allocated fixed income, what's the proper allocation for fixed income? I mean, are we talking 60/40 here, or how should people think about it?
STEVE LAIPPLY: Yeah, and I think this is where investors do have to have, you know, at least some view. So, you know, we recently laid out three scenarios. And they're pretty obvious ones.
But if you believe in the soft landing, you want to start moving back out into broad fixed income. So think AGG, IUSP. Also in that scenario, you would want to do potentially high yield, some EM. I mean, just sort of your overall broad diversified fixed income basket if you have confidence in that soft landing.
If you have concerns that the Fed is still very much in play here, and that inflation is going to be sticky and potentially, even keep kind of popping up a little bit higher, there are still plays can do in fixed income at the front end of the curve. So as an example, short dated tips, STIP would be a good way to do that.
And then, of course, you have very short dated Treasury exposures, Eskov, as an example, TFLO, things like that. And then finally, for a hard landing, which is still talked about, and that's the trade where everybody things are fine. We have to be higher for longer higher for longer. But all of a sudden, things start moving very, very rapidly.
And the data starts deteriorating. Then, of course, you would want to be in longer duration. And we all know what those tickers are. You know, you could have TLT or IGLB for long-dated investment grade, things like that to try to insulate your portfolio from a diversification standpoint if we do get that hard landing eventually.
- And, Steve, maybe stepping back from this conversation about what's the Fed going to do over the next six months, et cetera. I'm curious from a portfolio standpoint, what the competition has been for fixed income from things like not only private equity all private credit, you know, the landscape has changed for investors so much in the last 15 years. What's that conversation about what role fixed income specifically plays in there relative to you a really large menu for folks that has this know this safer profile? Let's say something that seems to be a fixed return. It's not a fixed income. But you know what I'm saying.
STEVE LAIPPLY: Yeah. And so this is the discussion right now. If you go back five years in order to get decent high single digit yields you had to be in high yield and beyond. You had to be in private credit. You had to be in also liquids really to stretch that yield if you go before we got into this inflationary period. So pre-2020.
Reels right now, believe it or not, are higher than they were in 2004 across the board. So if you look at all fixed income asset classes with the exception of high yield depending on when you measure it just because of where credit spreads can be in a given week. But broadly speaking, yields available in fixed income today are higher than they were 20 years ago. That affords tremendous opportunity and allows you in our view to get a more balanced portfolio.
Yeah, you should have all of the above in a diversified way. But you don't need to be overly reliant on illiquid product in order to get that yield now. As you know, you can get five odd percent in the front end. But we think you should diversify away from that and branch out an intermediate part of the curve and other asset classes.
