Treasury Yields Hit Highs: ETF Strategies to Follow

Fiscal Concerns Add to Bond Pressure

The moves followed data showing the U.S. fiscal deficit surged to $432.3 billion in July, the highest monthly shortfall since March 2021, as quoted on CNBC. The year-to-date deficit has approached $1.8 trillion, while interest payments on nearly $40 trillion of national debt have reached about $1.2 trillion this year.

Although recent inflation readings showed modest price increases in June and July, annual inflation remains above the Federal Reserve’s 2% target.

Middle East Tensions Stoke Inflation Fears

Oil prices climbed after the deadline for the United States and Iran to reach a peace agreement expired Monday, with Tehran ruling out an extension. Concerns over a prolonged closure of the Strait of Hormuz have added to inflation worries and pushed global bond yields higher.

Global Bond Yields Hit Multi-Year Highs

Inflation and geopolitical concerns have pushed long-term borrowing costs higher worldwide. Japan’s 10-year government bond yield reached a 30-year high, while Germany’s 30-year yield hit its highest level since 2011. France’s 30-year yield also reached a post-2008 high, while British government bond yields advanced, as quoted on the same CNBC article.

ETF Strategies to Play Rising Bond Yields

Given this, investors must be interested in finding out all possible strategies to weather a sudden jump in the benchmark interest rates. For them, below we highlighted a few investing tricks that could gift investors with gains in a rising rate environment.

Tap Senior Loan ETFs

Senior loans are floating rate instruments thus providing protection from rising interest rates.  This is because senior loans usually have rates set at a specific level above LIBOR and are reset periodically which help in eliminating interest rate risk. Further, as the securities are senior to other forms of debt or equity, senior bank loans offer lower default risks even after belonging to the junk bond space.

Virtus Seix Senior Loan ETF SEIX, which yields about 7.13% annually and Invesco Senior Loan ETF BKLN, which yields 6.47% annually are good picks here.

Play Floating Rate Bond ETFs

The floating rate bond has been an area to watch lately amid rising rate environment. Floating rate bonds are investment grade and do not pay a fixed rate to investors but have variable coupon rates that are often tied to an underlying index (such as LIBOR) plus a variable spread depending on the credit risk of issuers.

Since the coupons of these bonds are adjusted periodically, these are less sensitive to an increase in rates compared to the traditional bonds. Unlike fixed-coupon bonds, these do not lose value when the rates go up, making the bonds ideal for protecting investors against capital erosion in a rising rate environment.

iShares Floating Rate Bond ETF FLOT (yields 4.41% annually) and iShares Treasury Floating Rate Bond ETF TFLO (yields 3.79% annually) are two examples in this category.

Time for Cash-Like ETFs?

We believe cash and short-dated fixed income may play a greater role in adding stability to a portfolio. This is especially true given that the Fed may hike rates this year and short-term bond yields will rise alongside then. That would result in a similar rate for cash-like assets such as money-market funds.

Investing options include JPMorgan UltraShort Income ETF JPST (yields 4.19% annually), Invesco Global Short Term High Yield Bond ETF PGHY (yields 7.12% annually), and Fidelity Low Duration Bond Factor ETF FLDR (yields 4.28% annually). Such short-term bond ETFs also have lower interest rate sensitivity.

Hedge Rising Rates With Niche ETFs

There are some niche ETFs that guard against rising rates. These ETF options are: Simplify Interest Rate Hedge ETF PFIX, and Foliobeyond Rising Rates ETF RISR.

Go Short with Rate-Sensitive Sectors

Needless to say, sectors that perform well in a low-interest rate environment and offer higher yield, may falter when rates rise. Since real estate and utilities are such sectors, it is better to go for inverse REIT or utility ETFs.

ProShares UltraShort Real Estate SRS, ProShares Short Real Estate REK and ProShares UltraShort Utilities SDP are such inverse ETFs that could be wining bets in a rising rate environment.

Short U.S. Treasuries

Plus, shorting U.S. treasuries is also a great option in this type of a volatile environment. The picks include ProShares UltraShort 20+ Year Treasury ETF TBT), Direxion Daily 20+ Year Treasury Bear 3x Shares TMV and ProShares UltraShort 7-10 Year Treasury PST.

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This article originally published on Zacks Investment Research (zacks.com).

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