Beyond Cash Versus Duration: Building Diversified Income Portfolios

SPEAKER_1 (0:00)

Let's welcome in our next guest, Steve Laipply, Global Co-Head of iShares, Fixed Income ETFs, BlackRock. Good afternoon to you, Steve. So nice of you to join us on the program today. I'm just looking at the weekly flow of funds here. In fact, bonds outpaced equities with $17.5 billion of inflows versus the $10 billion for stocks. Is that what you're seeing?

Just give us a sense of the sort of demand that you're seeing right now.

Steve Laipply (0:30)

Yeah, so we're on our third year of sort of back-to-back record flows in bond ETFs. The industry is up well over 50% this year. And I think that's really interesting and maybe even surprising to a lot of people. And what's really driving it, I think, investors do understand that there's going to be volatility in yields.

We've seen this now for a couple of years where, let's take the 10-year.

We were below 4 at one point. We touched 5 We started heading back down again, and now we're coming back up towards 5 again. But throughout, we continue to see pretty consistent flows into bonds and bond ETFs. Yeah.

SPEAKER_1 (1:12)

I mean, look, the 10-year, nearly 20 basis point move this week. I mean, are you seeing investors chasing yields with these levels?

Steve Laipply (1:22)

I think there is an element of that. I think what investors are really saying with their dollars is that, while there is going to be volatility, they recognize the income opportunity. And if you step way back and zoom out, it's been 20 years since we've seen yields at these levels. And so when you have, as an example, 30-year real yields above 3%, that a lot of investors look at as an income opportunity to lock in long-term yields.

Could it go higher? Sure. Are there concerns about the fiscal situation and overall the trajectory of inflation? Sure. But I think investors do feel like these yield levels are fairly compelling.

SPEAKER_1 (2:06)

What about appetite for corporate bonds? I mean, given all this issuance, which as we've been talking about and even Besant has highlighted, has been, I guess, giving treasuries a run for their money of late. I mean, kind of eating government bonds lunch. I mean, it just feels like it's Uncle Jensen versus Uncle Sam right now as far as the commentary. What are you seeing?

Steve Laipply (2:30)

That's an element of the rise in yields. I mean, I do think you have a confluence of a number of factors that's pushing yields higher. You know, the crowding out argument is what you're referring to where, you know, there's a certain amount of bond demand to go around and Treasury's competing for some of that.

You have issuance in the corporate sector competing for some of that as well. And so it's part of it. But I do think overall, we're seeing flows across sectors. So our largest flows so far actually are in Treasuries.

Probably well over half our flows have been into Treasuries this year. Now granted, some of that is in Escove, which is I believe now two years running, the largest inflow bond ETF, that's our zero to three month T-bill fund. But then followed by that, you see broad Treasuries like GOVT. So it seems like there's room to go around here and we're seeing the next largest area of demand is multi-sector and then investment-grade corporate. So people are buying across these different sectors pretty consistently.

SPEAKER_1 (3:39)

Yeah. What's the key right now to building diversified sources of income? Because you say the debate is no longer about cash versus duration. So what are you seeing investors do to, I guess, build portfolios in layers, if you will?

Steve Laipply (3:58)

Yeah. I think that's an important point. We did get in this weird paradigm where people were thinking in a very binary way, oh, am I in cash or am I in long duration? Obviously, you have far more choices than that. We've tried to design our product suite to really give investors a lot of versatility. So as an example, yes, you should have some element of cash. You should for liquidity needs and everything else. So you have very short-dated ETFs like SGOV and money market ETFs to do that.

If you're worried about inflation, but are worried about duration risk at the same time, you have short-dated TIPS products like ICPI, which will give you inflation protection, but really reduce the duration exposure. From there, you really start building out income streams. So you can have something like a broad core bond fund, like total fixed income, which we call BTOT. Obviously, you can use a multi-sector active fund like BINC, which we've talked a lot about before, or you can do it yourself. We have, as I said, a number of different options across treasuries, corporates, high-yield, etc.