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The fixed income world, in particular Treasury bonds, scaled an enormous height this year on safe-haven bets. But the tables are turning thanks to a bunch of upbeat U.S. economic data and hawkish comments by a few Fed officials.
The domestic economy came up with decent-to-upbeat data points from the labor market, and the manufacturing, housing and retail sectors. Of this, a notable improvement in the job market along with wage gains can be viewed by the Fed as material improvement in the economy. Healing labor market is one of the benchmarks on which the Fed decides on policy tightening.
How Hawkish Fed Members Are?
Fed Vice Chairman Stanley Fischer recently stated that the goals of “maximum sustainable employment and an inflation rate of 2%’ no longer seem a far cry. With this comment, Fischer joined the pack of New York Fed President William Dudley and the Atlanta Fed President Dennis Lockhart, who also have been advocating a rate hike this year (read: Hawkish Fed Vice Chairman Adds Strength to These ETFs).
Lockhart believes that inflation is gradually turning "healthy" and Dudley appears confident about the job market. Dudley even hinted at the possibility of a September rate hike and but shied away from talking explicitly about a rate hike in his latest dialogue, going by an article published in CNBC. If this was not enough, San Francisco Fed President John Williams said in this context that “waiting too long could be costly for the economy.”
However, things are still undecided and only Fed chief Yellen can give clearer cues in the Jackson Hole, Wyoming, meeting. Still, present developments brought rate hike speculation back on the table.
What Will Happen to Fixed Income Investing?
The prospect of rising rates and risks to capital gains of bond holdings have left investors jittery about the safety of their portfolios. But investors should note that even if the Fed acts in September or in December, the gyrations would be felt more in the short part of the yield curve, not in the longer end.
Yield on the two-year Treasury note jumped 9 bps to 0.76% this month (as of August 24, 2016) while yield on the benchmark 10-year Treasury bond rose 5 bps to 1.56% and yield on the 30-year Treasury bond stayed the same at 2.24% (read: Treasury Bond ETFs in Focus on Rising Rate Hike Prospects).
But all is not finished in the fixed income space. Investors can profit out of the following products if the Fed hikes sooner-than-expected.
iPath US Treasury Flattener ETN
As yields on the short end of the curve are rising faster than the long end, and the spread between both yields is narrowing, indicating that the yield curve is flattening. Due to the rate hike bets, “Treasury two-year notes are the cheapest relative to 30-year bonds since the start of 2008”, as per Bloomberg.
To play this situation, FLAT which provides inverse exposure to the Barclays US Treasury 2Y/10Y Yield Curve Index, can be a good bet. The fund was up about 0.4% on August 24, 2016 (read: Profit from a Flattening Yield Curve with This ETF).
This investment grade fund too offers interest-hedge benefit to investors. The fund looks to track the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index. “The interest rate hedging part of the index is composed of short positions in Treasury securities. Hedge is designed to have sensitivity to interest rates equivalent to the long investment grade bond portfolio”, as per the factsheet. The fund was up over 0.5% on August 24, 2016.
Barclays Inverse US Treasury Aggregate ETN
The note provides investors a unique strategy to hedge against or benefit from the rising U.S. dollar interest rates. This benchmark employs a strategy, which follows the sum of the returns of the periodically rebalanced short positions in equal face values of each of the 2-year, 5-year, 10-year, long-bond and ultra-long U.S. Treasury futures contracts. The fund was up about 2.4% on August 24, 2016 (read: Interest Rate Speculation: A Boon for TAPR ETF).
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3 ETF Ways to Win if the Fed Acts in September
The fixed income world, in particular Treasury bonds, scaled an enormous height this year on safe-haven bets. But the tables are turning thanks to a bunch of upbeat U.S. economic data and hawkish comments by a few Fed officials.
The domestic economy came up with decent-to-upbeat data points from the labor market, and the manufacturing, housing and retail sectors. Of this, a notable improvement in the job market along with wage gains can be viewed by the Fed as material improvement in the economy. Healing labor market is one of the benchmarks on which the Fed decides on policy tightening.
How Hawkish Fed Members Are?
Fed Vice Chairman Stanley Fischer recently stated that the goals of “maximum sustainable employment and an inflation rate of 2%’ no longer seem a far cry. With this comment, Fischer joined the pack of New York Fed President William Dudley and the Atlanta Fed President Dennis Lockhart, who also have been advocating a rate hike this year (read: Hawkish Fed Vice Chairman Adds Strength to These ETFs).
Lockhart believes that inflation is gradually turning "healthy" and Dudley appears confident about the job market. Dudley even hinted at the possibility of a September rate hike and but shied away from talking explicitly about a rate hike in his latest dialogue, going by an article published in CNBC. If this was not enough, San Francisco Fed President John Williams said in this context that “waiting too long could be costly for the economy.”
However, things are still undecided and only Fed chief Yellen can give clearer cues in the Jackson Hole, Wyoming, meeting. Still, present developments brought rate hike speculation back on the table.
What Will Happen to Fixed Income Investing?
The prospect of rising rates and risks to capital gains of bond holdings have left investors jittery about the safety of their portfolios. But investors should note that even if the Fed acts in September or in December, the gyrations would be felt more in the short part of the yield curve, not in the longer end.
Yield on the two-year Treasury note jumped 9 bps to 0.76% this month (as of August 24, 2016) while yield on the benchmark 10-year Treasury bond rose 5 bps to 1.56% and yield on the 30-year Treasury bond stayed the same at 2.24% (read: Treasury Bond ETFs in Focus on Rising Rate Hike Prospects).
But all is not finished in the fixed income space. Investors can profit out of the following products if the Fed hikes sooner-than-expected.
iPath US Treasury Flattener ETN
As yields on the short end of the curve are rising faster than the long end, and the spread between both yields is narrowing, indicating that the yield curve is flattening. Due to the rate hike bets, “Treasury two-year notes are the cheapest relative to 30-year bonds since the start of 2008”, as per Bloomberg.
To play this situation, FLAT which provides inverse exposure to the Barclays US Treasury 2Y/10Y Yield Curve Index, can be a good bet. The fund was up about 0.4% on August 24, 2016 (read: Profit from a Flattening Yield Curve with This ETF).
ProShares Investment Grade-Interest Rate Hedged ETF (IGHG - Free Report)
This investment grade fund too offers interest-hedge benefit to investors. The fund looks to track the Citi Corporate Investment Grade (Treasury Rate-Hedged) Index. “The interest rate hedging part of the index is composed of short positions in Treasury securities. Hedge is designed to have sensitivity to interest rates equivalent to the long investment grade bond portfolio”, as per the factsheet. The fund was up over 0.5% on August 24, 2016.
Barclays Inverse US Treasury Aggregate ETN
The note provides investors a unique strategy to hedge against or benefit from the rising U.S. dollar interest rates. This benchmark employs a strategy, which follows the sum of the returns of the periodically rebalanced short positions in equal face values of each of the 2-year, 5-year, 10-year, long-bond and ultra-long U.S. Treasury futures contracts. The fund was up about 2.4% on August 24, 2016 (read: Interest Rate Speculation: A Boon for TAPR ETF).
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>