Bond ETFs and Rising Interest Rates
February 15th, 2013 at 5:16pm by Tom Lydon
As Treasury yields begin to rise, bond exchange traded fund investors are thinking about positioning ahead of rising rates after a three decade long bull rally in government debt. However, we may not see a quick rise in rates anytime soon, according Charles Schwab analysts.
“Our outlook is for interest rates to remain in a low range this year, but with the potential to edge higher,” Charles Schwab analysts said in a report. “Bond and bond fund holders should be aware of the risks of rising rates and make careful decisions about how to be positioned in fixed income when rates rise.”
Currently, Schwab maintains its “lower for longer” viewpoint due to the slowly recovering economy, low inflation and accommodative Fed measures. [How Rising Interest Rates Would Impact Top-Selling Bond ETFs]
On the other hand, if interest rates do rise, the analysts predict that it will be met with stronger demand, notably among the aging baby boom generation hungry for any kind of yield. [Treasury ETFs Weak as 10-Year Yield Above 2% Before Auction]
“With the demographic shift of the baby boom generation moving into retirement, we believe there will be demand for bonds as interest rates move up, tempering the magnitude of increase, all else being equal,” the analysts said. “The number of people in the age group where income is an important investment goal is rising relative to those who usually favor growth from their investments.”
Nevertheless, investors should be aware that rates don’t have much room to drop any lower. Meanwhile, with a recovering economy, the Fed may be forced to limit its bond buying program.
“Based on our analyses, interest rates have historically moved up on average seven months ahead of the Fed’s first tightening move,” the analysts added. “Therefore, we continue to suggest keeping portfolio duration in the short to intermediate range and emphasizing high quality credit over long maturity Treasuries.”
For more information on fixed-income assets, visit our bond ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.