A recent analysis by Apollo, a well-known asset management firm, has rung the alarm bells regarding the maturity of US government debt. Apollo's analysis reveals a concerning trend - the share of U.S. public debt due to mature in a year or less has surged to 31%. In terms of dollar amount, this equates to a staggering $7.6 trillion, a level last seen in early 2021, as quoted on a Business Insider article.

Higher Supply of Dent Will Push Up Bond Yields

Currently, the debt maturing in the near-term accounts for more than a quarter of the United States' Gross Domestic Product (GDP). Apollo's Chief Economist, Torsten Sløk, underlines the significance of the $7.6 trillion maturing debt as a potent force exerting upward pressure on U.S. interest rates.

The analysis also highlights the escalating federal deficits in recent years, a factor that has markedly elevated the trajectory of U.S. debt. In response to these challenges, the Treasury Department has conducted massive bond auctions. This quarter alone, the department has already auctioned an astounding $1 trillion in bonds, underscoring the extent of government borrowing.

Surging Borrowing Costs Amid Fed's Tightening

The situation is further complicated by the sharp increase in borrowing costs over the past year and a half. This increase is attributed to the Fed's aggressive tightening campaign, which has significantly raised the government's debt-servicing expenses.

The Federal Reserve's quantitative tightening program has also added pressure to interest rates by removing a major buyer from the bond market. The central bank allowed around $1 trillion of its debt holdings to roll off its balance sheet.

Money Market Funds Start to Level Off

While yields have climbed in recent months, the overall impact of Fed’s quantitative tightening (QT) on the market has been somewhat limited, as the Treasury has managed to find ample buyers among money market funds and private traders.

Then again, a research paper from the St. Louis Fed, published in late August, highlights a concerning trend - participation by money market funds in recent T-bill auctions has started to level off. This development raises concerns about the sustainability of demand, which in turn will push up bond yields in 2024.

Meanwhile, if inflation remains sticky and the economy remains hot, the Fed will likely hike interest rates, which will act as another blow to the bond market, resulting in bond yields by another round.

Below we highlight a few ETF Strategies to counter a spike in interest rates.

ETF Strategies in Focus

Tap Senior Loan ETFs

Senior loans are floating rate instruments thus providing protection from rising interest rates.  This is because senior loans usually have rates set at a specific level above LIBOR and are reset periodically which help in eliminating interest rate risk. Further, as the securities are senior to other forms of debt or equity, senior bank loans offer lower default risks even after belonging to the junk bond space.

Virtus Seix Senior Loan ETF (SEIX Quick QuoteSEIX - Free Report) , which yields about 7.59% annually and Highland/IBoxx Senior Loan ETF , which yields 7.49% annually are good picks here.

Still Want Bond Exposure? Look at These ETFs

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.

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 is a good bet in this context. The fund yields 4.74% annually.

Plus, shorting U.S. treasuries is also a great option in this type of a volatile environment. The picks include ProShares UltraShort 20+ Year Treasury ETF (TBT Quick QuoteTBT - Free Report) , Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV Quick QuoteTMV - Free Report) and etc.

Hedge Rising Rates With Niche ETFs

There are some niche ETFs that guard against rising rates. These ETF options are: Simplify Interest Rate Hedge ETF (PFIX), Global X Interest Rate Hedge ETF (RATE), Foliobeyond Rising Rates ETF (RISR) and Advocate Rising Rate Hedge ETF (RRH).

Go Short with Rate-Sensitive Sectors

Needless to say, sectors that perform well in a low interest rate environment and offer higher yield, may falter when rates rise. Since real estate and utilities are such sectors, it is better to go for inverse REIT or utility ETFs. ProShares UltraShort Real Estate (SRS) and ProShares UltraShort Utilities (SDP) are such inverse ETFs that could be wining bets in a rising rate environment.