When Will the Fed Stop Raising Rates? That’s the Trillion-Dollar Question for Bond Investors

When Will the Fed Stop Raising Rates? That’s the Trillion-Dollar Question for Bond Investors
When Will the Fed Stop Raising Rates? That’s the Trillion-Dollar Question for Bond Investors


Asset managers are betting on a flood of money into fixed-income funds that has yet to materialize.

Asset managers have been counting on what BlackRock calls a “generational opportunity" in the bond market, now that yields are at decade-plus highs.

Investors ranging from pension funds to retirement savers should be buying longer-term bonds to lock in higher rates, their thinking goes, spurring a flood of inflows to bond funds. BlackRock, for one, has projected assets under management at its bond exchange-traded funds to triple to $2.5 trillion by 2030.

There is just one problem: Those flows have yet to materialize. Relentless losses in the bond market have spooked investors who appear hesitant to jump in until they feel more confident that rates have peaked.

Investors pulled $78.6 billion from U.S.-based taxable bond funds in the 12 months through August, according to Morningstar. That is well below the nearly $300 billion they pulled from equities over the same period but a painful sum, regardless, for asset managers hoping for a windfall. The companies earn a percentage fee on the money they manage, so their earnings are affected by swings in market prices and the amount of money coming in or out.

“Investors remain wary of continued Fed hikes," said Jeff Klingelhofer, co-head of investments at mutual fund shop Thornburg Investment Management. “There’s a lot of negative sentiment and investor psychology reacting to rising rates, and the desire is to sit on the sidelines."

Bond prices and yields move inversely, so the Federal Reserve’s aggressive interest rate campaign is behind both the steep declines in prices and the sharp climb in yields. It has created an opportunity for investors on two fronts: Yields are at their highest level in more than 15 years, and since bonds pay out their full par value at maturity, investors buying and holding to the end can expect price appreciation, barring a default.

Many on Wall Street are touting the opportunity in the bond market. Deciding when to jump in is the hard part. Treasury yields have pushed higher in recent weeks, with the 10-year Treasury Note yield reaching 4.682% Monday, the highest level since 2007. Shares of BlackRock’s iShares 20+ Year Treasury Bond exchange-traded fund have dropped by nearly half from their 2020 peak, a startling loss for investors seeking safety in U.S. government debt.

“When you’re in an environment where bond yields go up every day, it starts getting a little nasty," said Steve Sosnick, chief strategist at Interactive Brokers. “I don’t see people rushing in to buy bonds right now just because they’re kind of a falling knife. They’re on sale and lower prices should create demand, but we’re not seeing that."

Investors appear content to wait out the bond rout while earning more than 5% in cash-like instruments including money-market funds, which have reported record inflows this year. The question of when, or if, they eventually move that money to longer-duration bond funds is key for asset managers’ outlook.

As bond losses accelerated over the past two weeks, BlackRock shares tumbled, at one point falling for nine consecutive trading days. They are off 9.3% in 2023. Shares of other publicly traded asset managers including T. Rowe Price, State Street, Invesco and Franklin Resources are also down, while the S&P 500 is hanging on to a 12% advance.

BlackRock, the world’s largest asset manager and bond fund provider, is scheduled to report quarterly results next week and investors will be listening carefully for executives’ expectations on fixed-income flows. On last quarter’s earnings call, BlackRock president and co-founder Rob Kapito called the potential for fixed-income flows a “once-in-a-generation opportunity."

“There is finally income to be earned in the fixed-income market, and we are expecting a resurgence in demand," Kapito said in July, adding that the roughly $7 trillion sitting in money-markets “is ready when people feel that rates have peaked to flood the fixed-income market."

Morgan Stanley analysts still expect a major reallocation to bonds to support BlackRock’s stock price in the coming quarters.

“When you really get confirmation and clarity that the Fed is done, we would expect to see more meaningful movement of flows into fixed-income," said Morgan Stanley analyst Michael Cyprys.

Although money has yet to move in a big way, Charles Schwab’s asset management arm has been fielding calls from interested clients.

“We are increasingly hearing from investors asking, ‘How can I lock in these type of rates for the foreseeable future?’" said David Botset, head of equity product management and innovation at Schwab Asset Management. “It does feel like the last couple of weeks have spooked some people that maybe we’re not at the top of increases."

Write to Jack Pitcher at

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