BlackRock global co-head of bond ETFs Steve Laipply joins Market Domination to discuss the state of the bond market as the Federal Reserve kicks off its rate-easing cycle. Laipply notes that September's hotter-than-expected jobs report alleviated investor concerns about a hard landing scenario for the US economy. Thus, larger cuts were priced out of the market for the rest of the year, and futures are now trading on the expectation of about 100 basis points worth of cuts in 2025. "People are really trying to size up exactly where we are and how the Fed is going to respond going forward. I think the important part here is that if you look back a year ago, we were at 5% on tens (^TNX). We're at 4% now. It is still not too late, in our view, to actually move into the bond market. We still have trillions sitting in cash. So it's going to be really hard to finesse this exactly right, but we do think investors should probably size up their fixed income allocation at these yield levels. If anything, it's an opportunity at this point," Laipply tells Yahoo Finance. He notes that the upcoming Consumer Price Index (CPI) report, the Fed's preferred inflation gauge, will give investors key insight into the state of inflation and the rate cut path ahead. If CPI were to come in weaker than expected, Laipply expects to see a pullback in yields. He adds, "I don't think we're expecting a wholesale jump in yields unless you get a really nasty inflation surprise." Laipply highlights that bond ETFs have seen a record amount of flows in 2024. "We blew past the 2021 number as an industry. At iShares, we just crossed $1 trillion in bond ETFs. Year-to-date in the US, we've taken around $75 billion. Most of that is in broad high-quality fixed income, so think of the AGG (AGG), things like that," he explains. In addition, there have been many allocations to treasuries. "I think the big message here is that investors are still largely under-allocated to fixed-income. So, the 60 over 40 is certainly not right for everybody. But if you think of that as just sort of a stalking horse, investors are fairly under-allocated to fixed income. Still at this point, a lot of investors are sitting in cash on the sidelines. So, I think at this point, if investors are still a little bit hesitant because of the volatility in yields, we think just at least stepping out of cash into kind of the intermediate part of the yield curve, there's reasonable value there," he advises.
Well, we're keeping an eye on the bond market, even as the Dow and S&P 500 on track to close
at new highs. Yields are jumping for the sixth day in a row, the 10-year now hovering just above
4% over the last couple of days. For more on this, we are joined by Steve Lapeley,
BlackRock Global co-head of bond ETF. Steve, great to have you on here. So I want to focus
on what we're seeing in the bond market first, and then we'll get to how that is playing into ETFs,
because we're seeing the 10-year above 4% over the last couple of days, even on the heels of
these Fed minutes. What does that tell you about how the market is pricing in or pricing out any
potential economic weakness moving forward? Well, Madison, thanks for having me. Yeah,
look, there's been quite a lot of debate since that very strong payroll number that came out.
There's debate around that number itself, in terms of whether the statistical adjustments
will lead to some sort of a revision down the road. But no doubt it was a strong number and
alleviated some concerns about a hard landing scenario. So you've seen the market respond to
that. You've seen the larger cuts get taken out of the market for the rest of the year.
Right now, if you look at where futures are trading, you're seeing a couple more 25-basis
point cuts, around 100 next year. And for this next cut in November, it's still hovering around
an 80% chance, not 100% chance, that you get that 25-basis point cut. The minutes revealed,
as your prior guests talked about, some debate around whether 50 or 25 was appropriate. So
there's just a lot of chatter in the market. People are really trying to size up exactly where
we are and how the Fed's going to respond going forward. I think the important part here is that
if you look back a year ago, we were at 5% on 10s. We're at 4% now. It is still not too late,
in our view, to actually move into the bond market. We still have trillions sitting in cash.
So it's going to be really hard to finesse this exactly right. But we do think investors should
probably size up their fixed income allocation at these yield levels. If anything, it's an
opportunity at this point. So let me ask you, Steve, when you look at the benchmark 10-year
URP, so 4063, where do you see that heading near intermediate term here?
Well, it's interesting. It's a little bit of deja vu, not at the same level. But we did see some
technical pressure last October as well. And I think right now, we do have a very big number
coming out tomorrow in terms of CPI. We'll see where we are after that. I think that if you get
a weak CPI number, you obviously would see a bit of a pullback in these yields. In absence of that,
if it's sort of a middling number, I think yields are probably going to be bouncing around here,
give or take. There's probably a little bit of technical pressure. There is some
short base that's kind of developing in the market. So you could see it maybe grinding a
bit higher. I don't think we're expecting a wholesale jump in yields unless you get a
really nasty inflation surprise. Well, it's interesting because you talked about how
investors should size up their fixed income allocation at these yield levels. Is that the
case for all investors? And I specifically want to get your take on retail investors,
because that's a primary part of our audience here at Yahoo Finance. What should they be
thinking in terms of positioning within bond ETFs specifically? Yeah, so we've started to see this
most of the flows this year. We've seen a record amount of flows this year. We blew past the 2021
number as an industry. At iShares, we just crossed a trillion dollars in bond ETFs. Year-to-date in
Most of that is in broad, high-quality fixed income. So think of the ag, things like that.
You then have quite a lot of allocations to treasuries, believe it or not. That's
spread around the curve from anywhere from TLT, the longest, all the way down to
ESCOB, which is the T-bill fund. I think the big message here is that investors
are still largely under-allocated to fixed income. So the 60-40 is certainly not right for everybody,
but if you think of that as just sort of a stalking horse, investors are fairly under-allocated
to fixed income. Still at this point, a lot of investors are sitting in cash on the sidelines.
So I think at this point, if investors are still a little bit hesitant because of the volatility
in yields, we think just at least stepping out of cash into kind of the intermediate part of
the yield curve, there's reasonable value there. So again, think of these kind of belly exposures
like the ag or sort of five-year treasuries, things of that nature.
Steve, when you talk about these record flows, I'm just curious, we have line of sight
where that's coming from. Is that retail, institution, both?
Yeah, I think overall, longer-term buy and hold flows tend to be more retail. But I do think there
has been a healthy amount of institutional flow here. We've seen several stories about
large institutional investors using bond ETFs to position. Interestingly, in treasuries,
the treasury market is still a fairly liquid market, but more and more, we're seeing
even pretty large, sophisticated institutional investors using bond ETFs, even in things like
treasuries and mortgages, to position duration very tactically as we move in and out of these
data cycles, as an example. But yeah, I think it splits buy and hold tends to be more retail,
but you do see a lot of tactical positioning by institutions using bond ETFs.
Steve, always great to have you on the show. Thank you for joining us.
Thanks for having me.
