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Time for Short-Term Bond ETFs to Enjoy Solid Current Income?
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The interest rates in the United States are expected to remain higher for longer. Despite some officials seeking a 0.25% hike in rates in June due to a solid labor market and signs of economic resilience, the decision to hold rates steady was unanimous, leading to a pause.
But the committee's dot plot revealed expectations of a funds rate of 5.6% by the end of 2023, implying two more quarter-point rate hikes before the year-end. The chances of a rate hike in July are pretty high at the current level. The possibility of raising rates at successive policy meetings is also likely.
As of Jul 7, 2023, there was a 93% chance of a 25 bps rate hike in the July meeting, per CME Fed Watch Tool. As of Jul 7, 2023, the yield on the six-month U.S. treasury note was 5.53%, higher than the 10-year note (i.e., 4.06%).
Decent U.S. Jobs Data
The upbeat jobs data has pushed up the chances of a rate hike. Though the U.S. economy added the lowest number of jobs since December 2020, the number remained more than twice the 70K-100K needed per month to keep up with growth in the working-age population.
Moreover, private sector jobs surged by 497,000 in June, way higher than the 267,000 gains in May and much better than the 220,000 estimate. Leisure and hospitality led with 232,000 new hires, followed by construction with 97,000, and trade, transportation and utilities at 90,000.
The benchmark U.S. treasury yields jumped to 4.06% on Jul 7 (following an upbeat ADP job print), up from 3.86% recorded on Jul 3. The one-month U.S. treasury yield jumped to 5.32% on Jul 6, up from 5.27% recorded on Jul 3. The broader market took a dive on Jul 5 and 6 due to higher rates.
Economic Slowdown in the Cards?
Rising rate worries are gripping the whole world, crippling the investing scenario again with uncertainty. Volatility may be the name of the game thanks to a host of factors ranging from high inflation in the United States and other parts of the developed world, fears of a slowdown in China and the resultant pressure on global growth, and geopolitical issues.
The BlackRock expects a mild slowdown but thinks that the near-term upside for markets is capped and that downside risks are underappreciated. As rising rate worries are prevalent this year, bond investing is also at its worse. This happens because bond prices share an inverse relationship with bond yields. Stocks are, in any case, in shambles.
Why Buying Short-Term Bond ETFs Makes Sense Now
The road ahead is a bit unclear. Hence, we believe cash and short-dated fixed income may play a greater role in adding stability to a portfolio. This is especially true given that the Fed will likely hike rates at least twice in the rest of this year and short-term bond yields will rise alongside. That would result in a similar rate for cash-like assets such as money-market funds.
ETFs in Focus
Below, we highlight a few short-term bond ETFs and their performance plus yields.
iShares 1-3 Year Treasury Bond ETF (SHY - Free Report) ) – 30-Day SEC yield is 4.76%
The underlying IDC US Treasury 1-3 Year Index (4PM) assesses U.S. Treasury-issued debt. Only U.S. dollar-denominated, fixed-rate securities with minimum term to maturity greater than one year and less than or equal to three years are included. The fund charges 15 bps in fees.
Vanguard Short-Term Bond ETF (BSV - Free Report) ) – 30-Day SEC yield is 4.83%
The underlying Bloomberg U.S. 1-5 Year Government/Credit Float Adjusted Index includes U.S. Treasury and agency obligations, as well as investment-grade corporate and international dollar-denominated bonds, all having maturities of 1 to 5 years. The fund charges 4 bps in fees. The 30-Day SEC yield is 4.83%.
The underlying Bloomberg US Treasury 1-3 Year Bond Index includes fixed-income securities issued by the U.S. Treasury, all with maturities between 1 and 3 years. The fund charges 4 bps in fees.
Schwab Short-Term U.S. Treasury ETF (SCHO - Free Report) ) – 30-Day SEC yield is 4.86%
The underlying Bloomberg US Treasury 1-3 Year Index includes all publicly-issued U.S. Treasury securities that have a remaining maturity of greater than or equal to one year and less than three years, rated investment grade and $250 million or more in outstanding face value. The fund charges 3 bps in fees.
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Time for Short-Term Bond ETFs to Enjoy Solid Current Income?
The interest rates in the United States are expected to remain higher for longer. Despite some officials seeking a 0.25% hike in rates in June due to a solid labor market and signs of economic resilience, the decision to hold rates steady was unanimous, leading to a pause.
But the committee's dot plot revealed expectations of a funds rate of 5.6% by the end of 2023, implying two more quarter-point rate hikes before the year-end. The chances of a rate hike in July are pretty high at the current level. The possibility of raising rates at successive policy meetings is also likely.
As of Jul 7, 2023, there was a 93% chance of a 25 bps rate hike in the July meeting, per CME Fed Watch Tool. As of Jul 7, 2023, the yield on the six-month U.S. treasury note was 5.53%, higher than the 10-year note (i.e., 4.06%).
Decent U.S. Jobs Data
The upbeat jobs data has pushed up the chances of a rate hike. Though the U.S. economy added the lowest number of jobs since December 2020, the number remained more than twice the 70K-100K needed per month to keep up with growth in the working-age population.
Moreover, private sector jobs surged by 497,000 in June, way higher than the 267,000 gains in May and much better than the 220,000 estimate. Leisure and hospitality led with 232,000 new hires, followed by construction with 97,000, and trade, transportation and utilities at 90,000.
The benchmark U.S. treasury yields jumped to 4.06% on Jul 7 (following an upbeat ADP job print), up from 3.86% recorded on Jul 3. The one-month U.S. treasury yield jumped to 5.32% on Jul 6, up from 5.27% recorded on Jul 3. The broader market took a dive on Jul 5 and 6 due to higher rates.
Economic Slowdown in the Cards?
Rising rate worries are gripping the whole world, crippling the investing scenario again with uncertainty. Volatility may be the name of the game thanks to a host of factors ranging from high inflation in the United States and other parts of the developed world, fears of a slowdown in China and the resultant pressure on global growth, and geopolitical issues.
The BlackRock expects a mild slowdown but thinks that the near-term upside for markets is capped and that downside risks are underappreciated. As rising rate worries are prevalent this year, bond investing is also at its worse. This happens because bond prices share an inverse relationship with bond yields. Stocks are, in any case, in shambles.
Why Buying Short-Term Bond ETFs Makes Sense Now
The road ahead is a bit unclear. Hence, we believe cash and short-dated fixed income may play a greater role in adding stability to a portfolio. This is especially true given that the Fed will likely hike rates at least twice in the rest of this year and short-term bond yields will rise alongside. That would result in a similar rate for cash-like assets such as money-market funds.
ETFs in Focus
Below, we highlight a few short-term bond ETFs and their performance plus yields.
iShares 1-3 Year Treasury Bond ETF (SHY - Free Report) ) – 30-Day SEC yield is 4.76%
The underlying IDC US Treasury 1-3 Year Index (4PM) assesses U.S. Treasury-issued debt. Only U.S. dollar-denominated, fixed-rate securities with minimum term to maturity greater than one year and less than or equal to three years are included. The fund charges 15 bps in fees.
Vanguard Short-Term Bond ETF (BSV - Free Report) ) – 30-Day SEC yield is 4.83%
The underlying Bloomberg U.S. 1-5 Year Government/Credit Float Adjusted Index includes U.S. Treasury and agency obligations, as well as investment-grade corporate and international dollar-denominated bonds, all having maturities of 1 to 5 years. The fund charges 4 bps in fees. The 30-Day SEC yield is 4.83%.
Vanguard Short-Term Treasury ETF (VGSH - Free Report) ) – 30-Day SEC yield is 4.88%
The underlying Bloomberg US Treasury 1-3 Year Bond Index includes fixed-income securities issued by the U.S. Treasury, all with maturities between 1 and 3 years. The fund charges 4 bps in fees.
Schwab Short-Term U.S. Treasury ETF (SCHO - Free Report) ) – 30-Day SEC yield is 4.86%
The underlying Bloomberg US Treasury 1-3 Year Index includes all publicly-issued U.S. Treasury securities that have a remaining maturity of greater than or equal to one year and less than three years, rated investment grade and $250 million or more in outstanding face value. The fund charges 3 bps in fees.