While rising interest rates made 2023 a great year for cash, it’s a different story for next year, according to BlackRock. Investors piled into money market funds this year, earning yields around 5% as the Federal Reserve continued to increase interest rates. While the central bank could raise rates again , the market believes it is done. Rate cuts are expected in 2024, based on fed funds futures pricing data, but BlackRock anticipates those cuts won’t come until the second half of the year. That means investors sitting in cash could be missing out on better fixed-income opportunities, Kristy Akullian, senior iShares investment strategist, said during a presentation of BlackRock’s 2024 global outlook Tuesday. “Risk cuts both ways, and right now we see the greatest risk to holding too much cash,” she said. In fact, investors could be rewarded the most during a Fed pause period, according to a BlackRock analysis of the past five rate-hiking cycles. It found that, on average, bonds returned almost twice as much during a Fed pause than in the months following the first rate cut, Akullian said. “Now is the time to get a little bit more active. Now is the time to take a little bit more risk in fixed income,” she said. That means starting to extend in duration, but not to the long end of the curve, BlackRock’s iShares Investment Strategy, Americas said in its 2024 outlook, which accompanied BlackRock’s global forecast. “We believe the intermediate portion of the yield curve represents the ‘sweet spot,’ optimizing potential price appreciation, liquidity, and current yield,” wrote Gargi Pal Chaudhuri, head of iShares Investment Strategy. The iShares 3-7 Year Treasury Bond ETF (IEI) captures that so-called “sweet spot” and has a 4.38% 30-day SEC yield, according to BlackRock. The fund has an expense ratio of 0.15%. IEI YTD mountain iShares 3-7 Year Treasury Bond ETF Investors should hold off on taking significant exposure to the long end until the yield curve returns to a more normal shape, Chaudhuri said. However, investors can supplement their core bond allocations with agency residential mortgage-backed securities, she said. The securities offer a diversified income stream that can help reduce credit risk, she added. The iShares MBS ETF (MBB) has a 30-day SEC yield of 3.39% and is composed of a broad-range of U.S. mortgage-backed bonds, including those issued by Fannie Mae, Freddie Mac and Ginnie Mae. The fund has an expense ratio of 0.05%. MBB 6M mountain iShares MBS ETF “We believe that exposure to mortgage backed securities has the potential to outperform broad based fixed income indices in 2024 as fixed income implied volatility normalizes alongside greater clarity on the path of policy rates,” Chaudhuri wrote. Lastly, emerging market debt is inexpensive right now, she said. Investors who want to dip a toe into that space can do so through the BlackRock Flexible Income ETF (BINC) , she said. The fund invests across emerging markets, high yield, securitized and non-U.S. credit and counts Brazil and Mexico debt among its top holdings. “A selective and active approach may be helpful as investors extend from cash and seek diversified income opportunities,” Chaudhuri said. The ETF has a 30-day SEC yield of 5.63%, and an expense ratio of 0.53%. BINC YTD mountain BlackRock Flexible Income ETF — CNBC’s Jesse Pound contributed reporting.
