Fixed income investors are in a difficult situation. Yields on treasury bills rose, leading to losses on fixed-rate bonds. But Treasury prices have not yet sold enough to make these bonds attractive as a source of yield.
The losses in the bond market this year have come mostly from long-term bonds, a measure of interest rate sensitivity that is tied to (but not the same as) the maturity of a bond. the
IShares 20+ Year Treasury Bond Exchange Traded Fund
(ticker: TLT) posted a loss of over 13% this year, as of Monday morning.
Few traders or investors expect the 10-year yield to stagnate below 2% over the long term, even if the selling of Treasuries takes intermittent pauses as it did on Monday, the 10-year yield down two basis points, or hundredths of a percentage point, to 1.6%. In fact, Wall Street strategists are discussing a possible end to the decades-long bond bull market. This does not bode well for long term, low coupon bonds.
So experts say investors should look outside of traditional fixed income portfolios to manage their exposure to rising yields because Barron’s reported this week. Bad bond markets in the US and overseas are an area of interest, as they typically have a shorter duration and greater sensitivity to economic growth that has driven yields higher.
Another area that has gained some attention is floating rate securities, which are available as both actively managed funds and ETFs. While closed active funds can boost returns through leverage, as Barron’s Hedged, investors may want to manage their expectations with floating rate ETFs, as safe floating rate bonds aren’t fetching much yet.
Most floating rate securities are compared to short-term interest rates, such as the London Interbank Offered Rate or its planned replacement, the Guaranteed nightly financing rate. And it’s not clear when those interest rates will rise and start providing a yield advantage, as the Federal Reserve cut interest rates to zero during the pandemic and plans to keep them there for at least two years. .
So, when investors are looking for floating rate ETFs, they have several options: they can invest in safer floating rate debt securities with the aim of avoiding losses, or they can look for ETFs that invest in segments. at higher market risk. , with wider spreads compared to their benchmark, to increase returns and returns. Both of these options are included in this screen, which covers funds in ETF.com’s Floating Rate Fund category with over $ 400 million in assets. ETFs focused strictly on floating rate treasury bills were excluded because these markets offer negligible returns.
The high risk category invests in bank loans, also known as leveraged loans, and is expected to appeal to investors who want to bet on the economic recovery and earn higher returns. But investors should be aware of the risks they take: While the funds themselves can be liquid, the underlying market has long transaction settlement times and has experienced weakening contractual protections for lenders, known as restrictive covenants. This introduces more risk during an economic downturn or times when investors are rushing for liquidity.
Another slowdown is not expected anytime soon, however. The most likely scenario is that strong economic growth leads to higher yields on treasury bills, leaving fixed-rate bonds more secure in the face of likely losses instead of riskier debt.
And for those who believe high inflation is on the way and that, despite assurances from Fed officials, inflation will cause central bankers to raise rates sooner than expected, safe funds could be a particularly worthwhile bet. . Safer bonds will be relatively insulated from any possibility of the Fed raising rates
Below is a list of variable rate ETFs, with their returns, asset classes and historical performance:
Note: SEC yield is 30 days, net of fees
Sources: ETF.com, fund documents
Write to Alexandra Scaggs at [email protected]