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Bond investors, once optimistic about the Federal Reserve initiating rate cuts soon, are now preparing for the higher-for-longer interest rates. This adjustment is in response to persistent inflation signals, prompting a reevaluation of the timeline for monetary policy easing in the United States.
Recent economic data, notably on producer prices, has sparked increased activity in options markets, with traders seeking protection against the possibility of sustained high interest rates. This reaction points to the broader market's sensitivity to inflation trends and fiscal dynamics, suggesting a cautious approach to navigate the current edgy investing backdrop.
Interest Rate Swaps Reflect Caution
Market sentiment, as inferred from interest rate swaps, now anticipates fewer than three quarter-point rate reductions within the year, a significant retreat from the six cuts anticipated at 2023's close, per a Bloomberg article. Doubts are mounting over any rate cuts occurring in the first half of the year, with the Fed’s upcoming policy meeting (scheduled this week) being eyed for potential signals of a more conservative easing cycle.
Recent Movements in Treasury Yields
The past week saw a notable jump in the US 10-year Treasury yields, closely approaching their highest level for the year, helped by strong economic and hot inflation data. Treasury yields have surged this month, threatening to hit new annual peaks, highlighting the market's adjusted outlook. The benchmark U.S. 10-year treasury yields jumped to 4.31% on Mar 15, 2024 from 4.09% recorded on Mar 7, 2024. The two-year U.S. treasury yield surged 22 bps to 4.72% during this timeframe.
Market Revised Down Outlook for Fed Rate Cuts
Traders have dialed back their expectations for immediate Fed rate cuts, now viewing them as less likely in the near term. Economists, including those from Nomura Holdings Inc., have revised their forecasts, now expecting fewer rate cuts from the Fed, the above-mentioned Bloomberg article indicated. Per CME FedWatch tool, chances of a 25-bp rate cut in June is now 52.7%, down from 59.6% recorded a week ago.
ETFs to Benefit
Against this backdrop, investors can hedge the rising rate trend with the below-mentioned ETFs. These ETFs have beaten the S&P 500 (down 0.1%) in the past five days.
Simplify Interest Rate Hedge ETF (PFIX - Free Report) – Up 7.6% Past Week
The fund seeks to hedge interest rate movements arising from rising long-term interest rates and to benefit from market stress when fixed income volatility increases. SEC 30-Day Yield as of 02/29/2024 is 3.80%. It charges 50 bps in fees.
Global X Interest Rate Hedge ETF (RATE - Free Report) – Up 6.1% Past Week
The Global X Interest Rate Hedge ETF is an actively managed ETF designed to benefit when long-term interest rates increase. The fund charges 47 bps in fees. 30-Day SEC Yield as of Mar 15, 2024 is 4.08% annually.
Foliobeyond Rising Rates ETF (RISR - Free Report) – Up 2.1% Past Week; Yields 7.36% annually
The FolioBeyond Alternative Income and Interest Rate Hedge ETF is an actively managed exchange-traded fund that seeks to provide diversification benefits and helps to manage risk from interest rate volatility, while generating current income under a wide range of interest rate environments. The expense ratio of the fund is 0.99%.
iShares Interest Rate Hedged High Yield Bond ETF (HYGH - Free Report) – Up 0.5% Past Week; Yields 8.79% annually
The underlying BlackRock Interest Rate Hedged High Yield Bond Index mitigates the interest rate risk of a portfolio composed of U.S. dollar-denominated, high yield corporate bonds. The fund charges 51 bps in fees.
iShares Floating Rate Bond ETF (FLOT - Free Report) – Up 0.2% Past Week; Yields 5.77% annually
The underlying Bloomberg US Floating Rate Note < 5 Years Index comprises of U.S. dollar-denominated, investment-grade floating rate bonds with remaining maturities between one month and five years. The fund charges 15 bps in fees.
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Play New Interest Rate Realities With These ETFs
Bond investors, once optimistic about the Federal Reserve initiating rate cuts soon, are now preparing for the higher-for-longer interest rates. This adjustment is in response to persistent inflation signals, prompting a reevaluation of the timeline for monetary policy easing in the United States.
Recent economic data, notably on producer prices, has sparked increased activity in options markets, with traders seeking protection against the possibility of sustained high interest rates. This reaction points to the broader market's sensitivity to inflation trends and fiscal dynamics, suggesting a cautious approach to navigate the current edgy investing backdrop.
Interest Rate Swaps Reflect Caution
Market sentiment, as inferred from interest rate swaps, now anticipates fewer than three quarter-point rate reductions within the year, a significant retreat from the six cuts anticipated at 2023's close, per a Bloomberg article. Doubts are mounting over any rate cuts occurring in the first half of the year, with the Fed’s upcoming policy meeting (scheduled this week) being eyed for potential signals of a more conservative easing cycle.
Recent Movements in Treasury Yields
The past week saw a notable jump in the US 10-year Treasury yields, closely approaching their highest level for the year, helped by strong economic and hot inflation data. Treasury yields have surged this month, threatening to hit new annual peaks, highlighting the market's adjusted outlook. The benchmark U.S. 10-year treasury yields jumped to 4.31% on Mar 15, 2024 from 4.09% recorded on Mar 7, 2024. The two-year U.S. treasury yield surged 22 bps to 4.72% during this timeframe.
Market Revised Down Outlook for Fed Rate Cuts
Traders have dialed back their expectations for immediate Fed rate cuts, now viewing them as less likely in the near term. Economists, including those from Nomura Holdings Inc., have revised their forecasts, now expecting fewer rate cuts from the Fed, the above-mentioned Bloomberg article indicated. Per CME FedWatch tool, chances of a 25-bp rate cut in June is now 52.7%, down from 59.6% recorded a week ago.
ETFs to Benefit
Against this backdrop, investors can hedge the rising rate trend with the below-mentioned ETFs. These ETFs have beaten the S&P 500 (down 0.1%) in the past five days.
Simplify Interest Rate Hedge ETF (PFIX - Free Report) – Up 7.6% Past Week
The fund seeks to hedge interest rate movements arising from rising long-term interest rates and to benefit from market stress when fixed income volatility increases. SEC 30-Day Yield as of 02/29/2024 is 3.80%. It charges 50 bps in fees.
Global X Interest Rate Hedge ETF (RATE - Free Report) – Up 6.1% Past Week
The Global X Interest Rate Hedge ETF is an actively managed ETF designed to benefit when long-term interest rates increase. The fund charges 47 bps in fees. 30-Day SEC Yield as of Mar 15, 2024 is 4.08% annually.
Foliobeyond Rising Rates ETF (RISR - Free Report) – Up 2.1% Past Week; Yields 7.36% annually
The FolioBeyond Alternative Income and Interest Rate Hedge ETF is an actively managed exchange-traded fund that seeks to provide diversification benefits and helps to manage risk from interest rate volatility, while generating current income under a wide range of interest rate environments. The expense ratio of the fund is 0.99%.
iShares Interest Rate Hedged High Yield Bond ETF (HYGH - Free Report) – Up 0.5% Past Week; Yields 8.79% annually
The underlying BlackRock Interest Rate Hedged High Yield Bond Index mitigates the interest rate risk of a portfolio composed of U.S. dollar-denominated, high yield corporate bonds. The fund charges 51 bps in fees.
iShares Floating Rate Bond ETF (FLOT - Free Report) – Up 0.2% Past Week; Yields 5.77% annually
The underlying Bloomberg US Floating Rate Note < 5 Years Index comprises of U.S. dollar-denominated, investment-grade floating rate bonds with remaining maturities between one month and five years. The fund charges 15 bps in fees.