Displaying items by tag: duration

(New York)

There are a lot of investors out there worried about rates moving higher and bond prices falling as a result. Treasury yields have moved much higher over the last year, which has spooked investors. All that said, one fund manager thinks investors shouldn’t fret too much. The reason why is that markets likely have already priced in rate hikes in, so losses shouldn’t be much. Furthermore, we have actually entered a more normal yield environment, where one can earn meaningful yields on shorter-term credits that don’t have much interest rate risk.

FINSUM: This article raises a good point about the current yield environment. While rate driven losses are worrying, we have finally entered an environment where one can earn comfortable yields on interest rate hedged portfolios.

(New York)

Investors need to face reality (not that they aren’t), this Fed is more hawkish than any since the Crisis, and despite the market turmoil there will be yet another hike before the end of the year. Rates will keep rising so long as the economy stays strong. That means investors need to prepare. They have mostly done so by fleeing bond funds, but that may not be wise, as there are some very attractive funds that can help offset interest rate risk. For instance, check out the ProShares Investment Grade—Intr Rt Hdgd (IGHG) and the iShares Interest Rate Hedged Corp Bd ETF (LQDH). IGHG is particularly interesting because while both funds go long corporate bonds and short treasuries to produce zero duration, IGHG holds less BBB rated bonds and has a higher quality portfolio, all of which has let the fund appreciate this year even as rates rose strongly.

FINSUM: There are some very solid and creative bond funds out there to help offset rate risk while still earning decent yields. Given where equities are right now, these seem like good buys.

(New York)

The reality is that the Fed has been hiking steadily, and investors should expect 2-3 more hikes in 2019. That means that adjusting one’s portfolio is a must. One thing to remember is that there are now plenty of ETFs that are designed to not lose from rates rising and still give an easy 2-3% yield. This is a big change from the post-Crisis paradigm, where safety meant negligible yields. One conservative way to play the environment is the SPDR Barclays 1-3 Treasury Bill ETF (BIL). Another is the iShares Floating Rate Bond ETF (FLOT), which only yields 2.5%, but with very little rate risk. One much more intriguing option is the WisdomTree Barclays U.S. Aggregate Bond Negative Duration ETF (AGDN). This fund holds a long bond position coupled with a short Treasury position with a target duration of -5 years, meaning it is designed to gain when rates rise.

FINSUM: This is a good selection of ETFs, and that Wisdomtree option looks quite interesting. It truly seems a way to profit as rates rise.

(New York)

Barron’s has just put out a strong warning telling investors that they should stay away from long-term bonds. If you step back from the day-to-day movements, the picture is clearly that yields are moving higher. For instance, they started April at 2.7% and are now at 3% for the ten-year. The longer the bond, the more its value is affected by yield movements, a concept called “duration risk”. Therefore, when markets are this volatile, it is best to stick to the short end of the curve.

FINSUM: Most advisors will know that investors have been pouring money into short-term bonds, probably because they seem like a great buy. For instance, two-year Treasuries are yielding around 2.5%.

(New York)

Alongside the rise in bond yields, investors have been pouring money into short-term bonds, says Barron’s. With rates and yields rising, short-term bonds have less rate risk. But even more, their yields look very attractive versus long-term bonds. Two-year treasury yields are now over 2.5%, versus just 3% on a ten-year note.

FINSUM: Why wouldn’t one be putting money in short-term bonds right now? They are relatively insensitive to rate hikes and are offering solid above-inflation yields.