BlackRock global co-head of bond ETFs Steve Laipply joins Market Domination to discuss the state of the bond market as the Federal Reserve kicks off its rate-easing cycle.

Laipply notes that September's hotter-than-expected jobs report alleviated investor concerns about a hard landing scenario for the US economy. Thus, larger cuts were priced out of the market for the rest of the year, and futures are now trading on the expectation of about 100 basis points worth of cuts in 2025.

"People are really trying to size up exactly where we are and how the Fed is going to respond going forward. I think the important part here is that if you look back a year ago, we were at 5% on tens (^TNX). We're at 4% now. It is still not too late, in our view, to actually move into the bond market. We still have trillions sitting in cash. So it's going to be really hard to finesse this exactly right, but we do think investors should probably size up their fixed income allocation at these yield levels. If anything, it's an opportunity at this point," Laipply tells Yahoo Finance.

He notes that the upcoming Consumer Price Index (CPI) report, the Fed's preferred inflation gauge, will give investors key insight into the state of inflation and the rate cut path ahead. If CPI were to come in weaker than expected, Laipply expects to see a pullback in yields. He adds, "I don't think we're expecting a wholesale jump in yields unless you get a really nasty inflation surprise."

Laipply highlights that bond ETFs have seen a record amount of flows in 2024. "We blew past the 2021 number as an industry. At iShares, we just crossed $1 trillion in bond ETFs. Year-to-date in the US, we've taken around $75 billion. Most of that is in broad high-quality fixed income, so think of the AGG (AGG), things like that," he explains. In addition, there have been many allocations to treasuries.

"I think the big message here is that investors are still largely under-allocated to fixed-income. So, the 60 over 40 is certainly not right for everybody. But if you think of that as just sort of a stalking horse, investors are fairly under-allocated to fixed income. Still at this point, a lot of investors are sitting in cash on the sidelines. So, I think at this point, if investors are still a little bit hesitant because of the volatility in yields, we think just at least stepping out of cash into kind of the intermediate part of the yield curve, there's reasonable value there," he advises.

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This post was written by Melanie Riehl