US Treasury yields are on the rise given the prospect of tighter Fed policy and persistently high inflation. 10-year yields topped the 1.6% level last week, their highest since June 4, while 20- and 30-year bond yields also jumped to levels previously seen in June.
The Fed has indicated that it will soon start canceling some of the monetary stimulus it provided during the pandemic crisis, mainly because inflation has reached and exceeded the Fed’s 2% target. The central bank is expected to start cutting monthly bond purchases as early as next month and complete the process by mid-2022. The policy statement also revealed that nine of the 18 Fed policymakers Fed policymakers expect interest rates to take off next year, up from seven in June. The midpoint also predicts three to four total rate hikes by the end of 2023. By the end of 2024, the midpoint of the FOMC is forecasting six to seven total rate hikes (read: ETFs to play yields of the higher reference treasury).
Meanwhile, inflation, which measures the increase in the cost of living over time, stands at 5.3% – the highest in almost 13 years – due to strong consumer demand, rising energy prices and supply chain shortages. What’s more, the Fed’s latest preferred inflation gauge rose 3.6% in August from the month a year earlier, the biggest jump since 1991. This has fueled concerns that Price increases will last longer than expected and will eventually affect consumer spending. Additionally, a surge in commodity prices, especially energy, as well as the wider reach of COVID-19 vaccinations have raised inflationary expectations.
That said, investors looking to prepare for higher rates might flock to bonds whose yields follow broader interest rates – floating rate bonds.
Why variable rate bonds?
Floating rate bonds are investment grade and do not pay a fixed rate to investors but have variable coupon rates which are often linked to an underlying index (such as LIBOR) plus a variable spread depending on risk. credit rating of issuers.
Since the coupons of these bonds are adjusted periodically, they are less sensitive to a rise in rates compared to traditional bonds. Unlike fixed coupon bonds, these do not lose value when rates rise, making them ideal for protecting investors against capital erosion in a rising rate environment.
Investors currently have four floating rate bond ETFs on the market, each of which could be a compelling choice (see: all quality corporate bond ETFs here).
iShares Floating Rate Bond ETF FLOT
This ETF tracks the Bloomberg Barclays US Floating Rate Note
SPDR Barclays Investment Grade Floating Rate ETF FLRN
This ETF tracks the Barclays US Dollar Floating Rate Note
FLTR Investment Grade Floating Rate ETF Market Vectors
This fund follows the Market Vectors Investment Grade Floating Rate Bond. Holding 222 shares, it has an average maturity of 2.88 years and a modified duration of 0.03 years. The product has accumulated $ 729 million in its asset base and trades an average daily volume of 217,000 shares. The expense ratio stood at 0.14%.
Invesco VRIG Investment Grade Floating Rate ETF
Investors looking for an active approach might find VRIG an attractive choice. This fund seeks to invest at least 80% of its net assets in a portfolio of quality floating rate instruments denominated in US dollars and issued in the United States. He has 188 bonds in his basket and has amassed $ 455.7 million in his asset base. The ETF trades an average daily volume of 90,000 shares and charges 30 basis points in annual fees.
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