BlackRock: Don’t Forget To Diversify Your Bonds (EMB)

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From BlackRock: Fundamental misconceptions about bond investing are common, according to new BlackRock research. Jeff Rosenberg shares three.

Intuitive isn’t a word that’s typically used to describe fixed income markets. It’s no surprise, then, that misconceptions about bond investing are common, according to a new BlackRock survey of 417 Americans with $50,000 or more in investible assets.

The survey, conducted from April 21 to 23, aimed to capture Americans’ understanding of fixed income investing. The main finding: Misunderstandings abound about bond basics and the role fixed income plays in a portfolio. Many investors seem aware of their knowledge deficit when it comes to fixed income fundamentals: Sixty percent of those surveyed said they don’t consider themselves knowledgeable regarding fixed income, and just 43% said they understand the market and economic forces that drive bond prices. Here’s a quick look at a few of the most common knowledge gaps, according to the new BlackRock research.

Misconception: Rising rates don’t negatively affect fixed income investments.

After years of declining and relatively low interest rates, the prospect of rising rates represents a sea change for investing, yet many Americans appear not to understand what this change could mean for investing strategies, according to the survey results.

Only about three in 10 (31%) of those surveyed correctly noted that if interest rates rise, the effect on the fixed income investments that investors already own is negative (when interest rates rise, bond prices fall). But more than twice as many (68%) got the link between rates and prices wrong: Thirty-five percent of those surveyed said there is a positive effect on current fixed income investments when rates rise, while 33% said rising rates make no difference for fixed income investments.

BlackRock’s view is that interest rates will rise from historic lows in coming months and years, making an already complex fixed income investing environment even more so, and investors need to be aware of the risk that rising rates pose to portfolios. Rising rates have the potential to touch all segments of the markets, not just fixed income, so it’s key for investors to seek out information so that they can fill any knowledge gaps regarding this critical trend.

Misconception: Fixed income investing is risk free.

Nearly one third (31%) of those surveyed said they strongly, or somewhat, agree with the statement that “with fixed income investments, you can’t lose your money.”

Misconception: Investing in one’s own country is enough for diversifying bond portfolios today.

Those surveyed appeared hesitant to consider investing beyond their borders, displaying a strong home bias. Sixty-nine percent said they would be more comfortable investing in bonds from the U.S. than from foreign countries. Investors, however, now generally need to consider investing beyond their borders as well as at home in order to achieve proper diversification. One reason: Global fixed income markets are becoming increasingly interdependent, as I write in my new Fixed Income Strategy piece Reevaluating reflation.

The U.S. has often led moves in global bond yields, such as during the “taper tantrum” of 2013 when then Federal Reserve Chairman Ben Bernanke sparked a global bond market rout by signaling the beginning of the end of quantitative easing. Yet the causality sometimes runs the other way, with global developments leading the U.S. Ultra loose monetary policies in Japan and the eurozone have exerted a gravitational pull on yields worldwide. And U.S. Treasury yields followed German bund yields lower in the period around the 2016 Brexit vote, with a similar pattern playing out in the run-up to the recent French presidential election.

Overall, the correlation between major bond markets has risen sharply, with the marketplace changing and becoming more interconnected globally. Against this backdrop, fixed income investors need to stay flexible and carefully consider the entire range of appropriate investing options, including opportunities abroad. Read more market insights in my monthly commentary on fixed income markets.

Jeffrey Rosenberg, Managing Director, is BlackRock’s Chief Investment Strategist for Fixed Income, and a regular contributor to The Blog.

Learn more about how consistent investment performance and low fees are critical to achieving your fixed income goals in today’s environment.

The iShares JPMorgan USD Emerging Market Bond Fund ETF (NYSE:EMB) was unchanged in premarket trading Friday. Year-to-date, EMB has gained 4.60%, versus a 8.16% rise in the benchmark S&P 500 index during the same period.

EMB currently has an ETF Daily News SMART Grade of A (Strong Buy), and is ranked #1 of 22 ETFs in the Emerging Markets Bonds ETFs category.

This article is brought to you courtesy of BlackRock.