Investors Turned to Short-Term Bond ETFs in Face of More Fed Rate Hikes


As fixed-income comes to grips with a rising interest rate outlook, more investors are turning to short-term bond exchange traded funds to ride out the storm and generate some extra cash along the way.

For example, among the most popular ETF plays over the past week, the SPDR Barclays 1-3 Month T-Bill (NYSEArca: BIL) attracted close to $2.0 billion in net inflows, the iShares Short Treasury Bond ETF (NYSEArca: SHV) brought in close to $1.9 billion in inflows, and the PIMCO Enhanced Short Maturity ETF (NYSEArca: MINT) added $390 million in inflows, according to ETFdb data.

Treasury bond yields, which rise when bond prices fall, have steadily increased after Federal Reserve Chairman Jerome Powell fueled fears that the central bank will maintain course on its aggressive interest rate hike outlook, even at the expense of weakening the U.S. economy, to curb record-high inflationary pressures.

According to Fed options markets, most investors anticipate the Fed to maintain its aggressive 75 basis point interest rate hike in the upcoming September meeting. Traders are also betting on rates to stay higher for longer, projecting the Fed’s benchmark rate to hit almost 4% by next June, the Wall Street Journal reports.

Consequently, the rate increases have now created opportunities for fixed-income investors. Short-duration strategies could complement cash and longer-dated bond allocations, offering potentially lower volatility versus longer duration bonds while preserving most of the carry. Additionally, investors should remember that ultrashort and short-duration bonds have exhibited strong risk/reward profiles during past Federal Reserve hiking periods.

“There’s a pretty good opportunity in short-term bonds, which are severely dislocated,” Doug Flynn, co-founder of Flynn Zito Capital Management, told CNN, recommending strategic income, flexible income mutual funds, or ETFs that hold a basket of bonds to help investors better diversify. “For those in higher income tax brackets, a similar opportunity exists in tax-free municipal bonds.”

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