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Fed Reluctant On Yield Curve Control Scheme: ETFs to Gain/Lose
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The Federal Reserve’s policymaking body released minutes of its Jul 28-29 meeting on Aug 19. The Fed gave a sombre outlook on the coronavirus-stricken economy. It noted that the course of economic recovery will depend on the progression of the virus. The ongoing public health crisis will continue to hurt economic activity, labor market and inflation in the near term.
On policy matters, "the committee members expressed skepticism over using bond purchases to control the government bond yield curve", as quoted on CNBC. The move was expected by many investors lately. As a result, post meeting, the benchmark 10-year U.S. treasury yield gained by one bps to 0.68% on Aug 19 from a day earlier. The yield on two-year treasuries were steady at 0.14%. Overall, the yield curve slightly steepened on Aug 19.
Against this backdrop, below we highlight a few ETFs that might gain/lose ahead.
Winners
Invesco DB US Dollar Index Bullish Fund (UUP - Free Report)
The U.S. dollar jumped against a basket of currencies on Aug 19. The fund UUP gained 0.8% on Aug 19 while it added 0.5% after hours (read: Best & Worst ETF Areas of July).
The fund gives exposure to debt instruments that pay a variable coupon rate, the majority of which are based on the three-month LIBOR, with a fixed spread. The fund has a low option adjusted duration of 0.14 years.
Unlike fixed coupon bonds, these do not lose value when the rates go up, making it ideal for protecting investors against capital erosion in a rising rate environment. Both factors make FLRN an intriguing choice to alleviate rising rate risks. The fund added 0.1% on Aug 19.
Gold pricesslid on a higher greenback. Selling pressure in the gold market built up as the minutes from the July monetary policy meeting indicated that the Fed is reluctant to cap bond yields. In any case, the gold market has been facing pressure lately on profit taking as the metal was trading around an all-time high a few day back. The fund GLD lost 3.2% on Aug 19 and shed 0.4% after hours.
Utilities is a rate-sensitive sector, which tends to perform well in a declining-rate environment. Since the latest Fed minutes steepened the yield curve slightly, the sector took a beating. The fund XLU lost 0.3% on Aug 19 and shed about 0.03% after hours.
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Fed Reluctant On Yield Curve Control Scheme: ETFs to Gain/Lose
The Federal Reserve’s policymaking body released minutes of its Jul 28-29 meeting on Aug 19. The Fed gave a sombre outlook on the coronavirus-stricken economy. It noted that the course of economic recovery will depend on the progression of the virus. The ongoing public health crisis will continue to hurt economic activity, labor market and inflation in the near term.
On policy matters, "the committee members expressed skepticism over using bond purchases to control the government bond yield curve", as quoted on CNBC. The move was expected by many investors lately. As a result, post meeting, the benchmark 10-year U.S. treasury yield gained by one bps to 0.68% on Aug 19 from a day earlier. The yield on two-year treasuries were steady at 0.14%. Overall, the yield curve slightly steepened on Aug 19.
Against this backdrop, below we highlight a few ETFs that might gain/lose ahead.
Winners
Invesco DB US Dollar Index Bullish Fund (UUP - Free Report)
The U.S. dollar jumped against a basket of currencies on Aug 19. The fund UUP gained 0.8% on Aug 19 while it added 0.5% after hours (read: Best & Worst ETF Areas of July).
SPDR Bloomberg Barclays Investment Grade Floating Rate ETF (FLRN - Free Report)
The fund gives exposure to debt instruments that pay a variable coupon rate, the majority of which are based on the three-month LIBOR, with a fixed spread. The fund has a low option adjusted duration of 0.14 years.
Unlike fixed coupon bonds, these do not lose value when the rates go up, making it ideal for protecting investors against capital erosion in a rising rate environment. Both factors make FLRN an intriguing choice to alleviate rising rate risks. The fund added 0.1% on Aug 19.
Losers
SPDR Gold Shares (GLD - Free Report)
Gold pricesslid on a higher greenback. Selling pressure in the gold market built up as the minutes from the July monetary policy meeting indicated that the Fed is reluctant to cap bond yields. In any case, the gold market has been facing pressure lately on profit taking as the metal was trading around an all-time high a few day back. The fund GLD lost 3.2% on Aug 19 and shed 0.4% after hours.
Utilities Select Sector SPDR Fund (XLU - Free Report)
Utilities is a rate-sensitive sector, which tends to perform well in a declining-rate environment. Since the latest Fed minutes steepened the yield curve slightly, the sector took a beating. The fund XLU lost 0.3% on Aug 19 and shed about 0.03% after hours.
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 >>