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Rates have been rising fast in the United States over the past few weeks on growing risk appetite and reflationary optimism as well as QE taper talks. Vaccine distribution, news of the success of the anti-viral drugs by Merck and a few upbeat economic data points gave a material boost to the U.S. treasury yields. The U.S. benchmark treasury yield was 1.54% on Oct 5 versus 0.93% at the start of the year.
Federal Reserve Chair Jerome Powell said the central bank could start scaling back asset purchases as soon as in November and finish the process by mid-2022. Several officials are even interested to hike interest rates next year (read: Fed Taper to Start in November? 7 ETFs to Buy).
The ISM Manufacturing PMI in the United States increased for the second straight month to 61.1 in September 2021 and came in above market expectations of 59.6. The latest reading came in as one of the strongest rates of expansion since 1983, thanks to solid increases in production (59.4 versus 60.0 in August) and new orders (66.7, the same as in August), as well as a moderate uptick in the employment levels (50.2 versus 49.0). At the same time, factories faced supply chain issues and inflationary pressure.
Given this, investors must be interested in finding out the ways to weather a sudden jump in the benchmark bond yields and increased inflationary expectations (read: ETF Strategies to Play Rising U.S. Treasury Yields).
The underlying FTSE 30-Year TIPS (Treasury Rate-Hedged) Index tracks the performance of long positions in the most recently issued 30-year TIPS and duration-adjusted short positions in U.S. Treasury bonds of, in aggregate, approximate equivalent duration dollars to the TIPS. It charges 30 bps in fees. Investors should note that the 30-year Breakeven Inflation Rate was 2.24% in September 2021.
Floating rate notes are investment grade bonds that do not pay a fixed rate to investors but have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of the issuers. Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared to traditional bonds (read: Hedge Rising Rates with Floating Rate ETFs).
Unlike fixed coupon bonds, these do not lose value when rates go up, making the notes ideal for protecting investors against capital erosion in a rising rate environment. iShares Floating Rate Bond (FLOT - Free Report) is a good bet in this context. The fund charges 20 bps in fees.
Invesco S&P MidCap 400 Pure Value ETF (RFV - Free Report) )
Value funds normally fare better in a rising-rate environment. Investors should note that value stocks underperform growth stocks in a low-rate environment. With the yield on 10-year Treasuries making an uptrend, there could be shift from momentum to value shares.
The yield curve steepened materially. As of Oct 1, spread between the yield on the benchmark U.S. treasury and the yield on the two-year treasury was 145 basis points. Notably, this spread was 124 bps at the start of September.
The biggest winner of the steepening yield curve is the banking sector. Bargain hunting added some gains. As banks seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve will earn more on lending and pay less on deposits, thereby leading to a wider spread. This will expand net margins and increase banks’ profits.
With the 10-year Treasury yield rising, income-loving investors would definitely look for other better options. VYM yields 2.84% currently. Plus, the dividend payout scenario has also improved within corporate America.
iShares Preferred And Income Securities ETF (PFF - Free Report)
Preferred securities as an asset class are hybrid securities, having traits of both equity shares as well as fixed income securities. These are classified as shares having a fixed rate of dividend on their face value (par value). The fund yields 4.51% annually, which is pretty higher as compared with the benchmark U.S. treasuries as of Oct 1.
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ETFs to Play Higher Benchmark Treasury Yields
Rates have been rising fast in the United States over the past few weeks on growing risk appetite and reflationary optimism as well as QE taper talks. Vaccine distribution, news of the success of the anti-viral drugs by Merck and a few upbeat economic data points gave a material boost to the U.S. treasury yields. The U.S. benchmark treasury yield was 1.54% on Oct 5 versus 0.93% at the start of the year.
Federal Reserve Chair Jerome Powell said the central bank could start scaling back asset purchases as soon as in November and finish the process by mid-2022. Several officials are even interested to hike interest rates next year (read: Fed Taper to Start in November? 7 ETFs to Buy).
The ISM Manufacturing PMI in the United States increased for the second straight month to 61.1 in September 2021 and came in above market expectations of 59.6. The latest reading came in as one of the strongest rates of expansion since 1983, thanks to solid increases in production (59.4 versus 60.0 in August) and new orders (66.7, the same as in August), as well as a moderate uptick in the employment levels (50.2 versus 49.0). At the same time, factories faced supply chain issues and inflationary pressure.
Given this, investors must be interested in finding out the ways to weather a sudden jump in the benchmark bond yields and increased inflationary expectations (read: ETF Strategies to Play Rising U.S. Treasury Yields).
For them, below we highlighted a few ETFs.
ETFs in Focus
ProShares Inflation Expectations ETF (RINF - Free Report)
The underlying FTSE 30-Year TIPS (Treasury Rate-Hedged) Index tracks the performance of long positions in the most recently issued 30-year TIPS and duration-adjusted short positions in U.S. Treasury bonds of, in aggregate, approximate equivalent duration dollars to the TIPS. It charges 30 bps in fees. Investors should note that the 30-year Breakeven Inflation Rate was 2.24% in September 2021.
iShares Floating Rate Bond ETF (FLOT - Free Report)
Floating rate notes are investment grade bonds that do not pay a fixed rate to investors but have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of the issuers. Since the coupons of these bonds are adjusted periodically, they are less sensitive to an increase in rates compared to traditional bonds (read: Hedge Rising Rates with Floating Rate ETFs).
Unlike fixed coupon bonds, these do not lose value when rates go up, making the notes ideal for protecting investors against capital erosion in a rising rate environment. iShares Floating Rate Bond (FLOT - Free Report) is a good bet in this context. The fund charges 20 bps in fees.
Invesco S&P MidCap 400 Pure Value ETF (RFV - Free Report) )
Value funds normally fare better in a rising-rate environment. Investors should note that value stocks underperform growth stocks in a low-rate environment. With the yield on 10-year Treasuries making an uptrend, there could be shift from momentum to value shares.
SPDR S&P Bank ETF KBE)
The yield curve steepened materially. As of Oct 1, spread between the yield on the benchmark U.S. treasury and the yield on the two-year treasury was 145 basis points. Notably, this spread was 124 bps at the start of September.
The biggest winner of the steepening yield curve is the banking sector. Bargain hunting added some gains. As banks seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve will earn more on lending and pay less on deposits, thereby leading to a wider spread. This will expand net margins and increase banks’ profits.
Vanguard High Dividend Yield ETF (VYM - Free Report)
With the 10-year Treasury yield rising, income-loving investors would definitely look for other better options. VYM yields 2.84% currently. Plus, the dividend payout scenario has also improved within corporate America.
iShares Preferred And Income Securities ETF (PFF - Free Report)
Preferred securities as an asset class are hybrid securities, having traits of both equity shares as well as fixed income securities. These are classified as shares having a fixed rate of dividend on their face value (par value). The fund yields 4.51% annually, which is pretty higher as compared with the benchmark U.S. treasuries as of Oct 1.