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Treasury Yields Hit Multi-Year Highs: ETFs to Gain
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Key Takeaways
Rising Treasury yields and inflation fears are pressuring bond markets.
Floating-rate, senior loan and short-duration ETFs may benefit from higher rates.
Inverse Treasury and rate-hedging ETFs offer strategies for navigating rising yields.
U.S. Treasury yields moved sharply higher this week. The 10-year Treasury yield climbed to 5.04%, its highest level since 2007, while the 30-year yield reached 5.39%, as mentioned in Yahoo Finance.
Fed Hike and Oil Add to Inflation Pressure
Markets are largely expecting the Fed to raise interest rates by 25 basis points at Wednesday’s FOMC meeting, with the CME FedWatch Tool showing a 92% probability of a hike. At the same time, crude oil prices above $100 per barrel are fueling concerns that inflation could remain above the Fed’s 2% target.
Deficits Keep Bond Yields Elevated
The rise in yields also reflects growing concerns about the U.S. government’s heavy debt burden and widening fiscal deficit. Higher Treasury yields can push up mortgage rates and other long-term borrowing costs, increasing financing expenses across the economy.
Global Rates Add to the Pressure
The increase in borrowing costs is not limited to the United States. Bond yields have also climbed in major economies such as Japan, the United Kingdom and Germany.
Another factor could be the unwinding of the yen carry trade. As Japanese interest rates rise and the yen strengthens, borrowing cheaply in Japan to invest in higher-yielding assets overseas becomes less attractive, potentially adding further pressure to global bond markets.
ETF Strategies to Play Rising Bond Yields
Given this, investors must be interested in finding out all possible strategies to weather a sudden jump in the benchmark interest rates. For them, below we highlighted a few investing tricks that could gift investors with gains in a rising rate environment.
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, which yields about 7.05% annually and Invesco Senior Loan ETF (BKLN - Free Report) , which yields 6.41% annually are good picks here.
Play Floating Rate Bond ETFs
The floating rate bond has been an area to watch lately amid rising rate environment. Floating rate bonds are investment grade and 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 issuers.
Since the coupons of these bonds are adjusted periodically, these are less sensitive to an increase in rates compared to the traditional bonds. Unlike fixed-coupon bonds, these do not lose value when the rates go up, making the bonds ideal for protecting investors against capital erosion in a rising rate environment.
iShares Floating Rate Bond ETF (FLOT - Free Report) (yields 4.34% annually) and iShares Treasury Floating Rate Bond ETF (TFLO - Free Report) (yields 3.75% annually) are two examples in this category.
Time for Cash-Like ETFs?
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 may hike rates this year and short-term bond yields will rise alongside then. That would result in a similar rate for cash-like assets such as money-market funds.
Investing options include JPMorgan UltraShort Income ETF (JPST - Free Report) (yields 4.17% annually), Invesco Global Short Term High Yield Bond ETF (PGHY - Free Report) (yields 7.15% annually), and Fidelity Low Duration Bond Factor ETF (FLDR - Free Report) (yields 4.21% annually). Such short-term bond ETFs also have lower interest rate sensitivity.
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 (yields 7.15% annually), and Foliobeyond Rising Rates ETFRISR (yields 5.85% annually).
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 - Free Report) , ProShares Short Real Estate (REK - Free Report) and ProShares UltraShort Utilities (SDP - Free Report) are such inverse ETFs that could be wining bets in a rising rate environment.
Short U.S. Treasuries
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 - Free Report) , Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV - Free Report) and ProShares UltraShort 7-10 Year Treasury (PST - Free Report) .
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Treasury Yields Hit Multi-Year Highs: ETFs to Gain
Key Takeaways
U.S. Treasury yields moved sharply higher this week. The 10-year Treasury yield climbed to 5.04%, its highest level since 2007, while the 30-year yield reached 5.39%, as mentioned in Yahoo Finance.
Fed Hike and Oil Add to Inflation Pressure
Markets are largely expecting the Fed to raise interest rates by 25 basis points at Wednesday’s FOMC meeting, with the CME FedWatch Tool showing a 92% probability of a hike. At the same time, crude oil prices above $100 per barrel are fueling concerns that inflation could remain above the Fed’s 2% target.
Deficits Keep Bond Yields Elevated
The rise in yields also reflects growing concerns about the U.S. government’s heavy debt burden and widening fiscal deficit. Higher Treasury yields can push up mortgage rates and other long-term borrowing costs, increasing financing expenses across the economy.
Global Rates Add to the Pressure
The increase in borrowing costs is not limited to the United States. Bond yields have also climbed in major economies such as Japan, the United Kingdom and Germany.
Another factor could be the unwinding of the yen carry trade. As Japanese interest rates rise and the yen strengthens, borrowing cheaply in Japan to invest in higher-yielding assets overseas becomes less attractive, potentially adding further pressure to global bond markets.
ETF Strategies to Play Rising Bond Yields
Given this, investors must be interested in finding out all possible strategies to weather a sudden jump in the benchmark interest rates. For them, below we highlighted a few investing tricks that could gift investors with gains in a rising rate environment.
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, which yields about 7.05% annually and Invesco Senior Loan ETF (BKLN - Free Report) , which yields 6.41% annually are good picks here.
Play Floating Rate Bond ETFs
The floating rate bond has been an area to watch lately amid rising rate environment. Floating rate bonds are investment grade and 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 issuers.
Since the coupons of these bonds are adjusted periodically, these are less sensitive to an increase in rates compared to the traditional bonds. Unlike fixed-coupon bonds, these do not lose value when the rates go up, making the bonds ideal for protecting investors against capital erosion in a rising rate environment.
iShares Floating Rate Bond ETF (FLOT - Free Report) (yields 4.34% annually) and iShares Treasury Floating Rate Bond ETF (TFLO - Free Report) (yields 3.75% annually) are two examples in this category.
Time for Cash-Like ETFs?
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 may hike rates this year and short-term bond yields will rise alongside then. That would result in a similar rate for cash-like assets such as money-market funds.
Investing options include JPMorgan UltraShort Income ETF (JPST - Free Report) (yields 4.17% annually), Invesco Global Short Term High Yield Bond ETF (PGHY - Free Report) (yields 7.15% annually), and Fidelity Low Duration Bond Factor ETF (FLDR - Free Report) (yields 4.21% annually). Such short-term bond ETFs also have lower interest rate sensitivity.
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 (yields 7.15% annually), and Foliobeyond Rising Rates ETF RISR (yields 5.85% annually).
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 - Free Report) , ProShares Short Real Estate (REK - Free Report) and ProShares UltraShort Utilities (SDP - Free Report) are such inverse ETFs that could be wining bets in a rising rate environment.
Short U.S. Treasuries
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 - Free Report) , Direxion Daily 20+ Year Treasury Bear 3x Shares (TMV - Free Report) and ProShares UltraShort 7-10 Year Treasury (PST - Free Report) .