Market Overview

Bond ETF Ideas For A Hawkish Fed

Bond ETF Ideas For A Hawkish Fed

Bond markets are pricing in an interest rate hike by the Federal Reserve in December. Even the Fed moves forward with its first bump in borrowing costs this year, U.S. interest rates will still below by historical standards, but that is not stopping markets from punishing some fixed assets.

Nor is it stopping investors from gravitating to lower duration fare. Investors can actually do better on the duration front by tapping negative duration exchange traded funds. That includes the WisdomTree Barclays U.S. Aggregate Bond Negative Duration Fund, WisdomTree Trust (NASDAQ: AGND), a negative duration spin on the widely followed Barclays U.S. Aggregate Bond Index.

The Stock And Index

AGND, which is nearly three years old, has an effective duration of -4.13 years and a 30-day SEC yield of almost 1.5 percent. Negative duration offerings, such as AGND, and high-yield plays, including the WisdomTree BofA Merrill Lynch High Yield Bond Negative Duration Fund, WisdomTree Trust (NASDAQ: HYND), can help investors combat a steepening yield curve. Yield curves steepen when long-term rates rise more quickly than short-term rates.

“Since July 8, rates have increased by 31, 60, 78 and 85 bps across the 2-, 5-, 10- and 30-year parts of the curve. As a result, the yield curve2 has steepened by 47 bps between the 2- and 10-year segments. While this has been painful for long-only bond strategies, negative duration strategies have provided positive returns,” said WisdomTree in a note out Tuesday.


Negative duration strategies have helped offset some of the recent losses incurred by traditional fixed income strategies.

Investors wanting to stick with high-yield corporate exposure while fending off the potential dangers of a steepening yield curve can consider the WisdomTree BofA Merrill Lynch High Yield Bond Negative Duration Fund.

HYND follows the BofA Merrill Lynch 0-5 Year US High Yield Constrained and has an effective duration of almost -6.3 years, according to issuer data.

Traditional bond ETFs often make investors choose between lower interest rate risk and strong yields, but HYND does the opposite. With a negative duration, the ETF is explicitly designed to prove durable as interest rates rise, but that does not require yield sacrifice on investors' parts as highlighted by the ETF's 30-day SEC yield of just over 5 percent.

“Negative duration indexes 'overhedge' a long exposure in a portfolio of bonds by selling longer-maturity securities. As a result, the index is able to target a duration of negative five years while still generating income,” added WisdomTree.


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