Barron's had a quick profile on the Blackrock Flexible Income Fund (BINC) which is an active ETF managed by Rick Reider. I am less interested int he fund than this excerpt from the beginning of the article.
It pretty much parrots what we've been talking about here for ages. I've been saying meaningful yield without too much volatility is what investors hope the bond portion of their portfolio will give. That just isn't the reality. The diversification benefits of intermediate and longer term bonds is not what it used to be. The simple 40 year trade for bonds of "number go up" is finished and as a matter of math, can't be repeated.
Taking volatility out of a fixed income portfolio is fairly simple. an investor can get most of the way there just by shortening duration and diversifying among different income sectors. Interest rate risk/duration is a big source of volatility. That might not be great wording, longer maturities have more convexity, more sensitivity to changes in interest rates. I'm not saying outperforming is fairly simple, just that reducing volatility is, even if eliminating volatility entirely might be a little trickier.
Less so in the last few weeks but late in 2023 a lot of pundits were saying it was time to add duration despite those yields being lower than short dated paper. They seemed to be selling the fear that yields would be going down and that we should lock in now (back then). Since then the idea of six (was is six?) rate cuts this year unraveled down to three and while the inflation data has improved mightily since a couple of years ago or so, it sort of stopped going down for the time being.
Part of where I am coming from on this is how terribly wrong the consensus has been on how to engage fixed income markets for such a long time. There was not widespread concern over the inherent risk of buying 10 year paper yielding 2%....and then it went much lower, dramatically increasing the risk. Great for anyone who traded those moves successfully for capital gains but if that is not your trade, it is not my trade, then you should have avoided that part of the market as we said here all along.
Several times I've cited corporate issues I've seen in accounts I don't manage maturing in the mid-2030's being carried at 70 cents on the dollar. They're going to stay there for many years unless rates go down dramatically. That might happen but that is an awful spot to be in.
How many investors didn't realize declines like this were possible? Worse, how many advisors didn't realize?
I learned a long time ago, I've not very good at "predicting" interest rates. If you've been reading this site and previous blog locations before this one, you know that I've been framing this as avoiding risk and avoiding volatility. Maybe that's a little easier. Getting paid 2% for 10 years just is not attractive. Maybe at 7% it makes more sense to take on the volatility, there'd be a lot less risk buying at 7%. I have no idea if 7% will ever come again or 6% but we can get decent yields from much shorter durations and if the middle of the curve or even further out ever goes up a lot then we can talk about buying at that time.
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