Interest Rate Risk & Bond ETFs

After a three decade long rally in the Treasuries market, yields are inching higher, causing investors to reconsider interest rate risk and its effect on bond exchange traded funds.

“Normally, people don’t think of Treasuries as riskier than equities, but 30-year Treasuries are now more volatile than equities are,” Rick Rieder, co-head of fixed income at BlackRock, said in an InvestmentNews article.

Large money managers, like BlackRock Inc., TCW Group Inc. and Pacific Investment Management Co., are already making preemptive measures against rising rates, moving into floating rate debt, interest-rate swaps and inflation-protected securities, reports Matt Wirz for the Wall Street Journal. [Bond ETFs and the Curious Case of the Rising Rate Redux]

  • iShares Floating Rate Note Fund (NYSEArca: FLOT)
  • SPDR Barclays Capital Investment Grade Floating Rate (NYSEArca: FRLN)
  • iShares Barclays Treasury Inflation Protected Securities Fund (NYSEArca: TIP)
  • PIMCO 1-5 Year US TIPS Index Exchange-Traded Fund (NYSEArca: STPZ)

Meanwhile, the more aggressive investor is taking bearish bets on U.S. Treasuries.

  • ProShares Short 20 Year Treasury (NYSEArca: TBF)
  • ProShares Short 7-10 Year Treasury (NYSEArca: TBX)

“We don’t subscribe to the view that once the fire starts, we’ll be able to outrun everybody through the door,” said Stephen Kane, managing director for U.S. fixed income, said in the article. “Rates could be up 50 basis points before your traders can get all the sell orders through.”

When the Fed increased rates in 1994, 30-year bond prices plunged 24% in a year. Bond yields and prices have an inverse relationship – a higher yield translates to lower bond prices. [Vanguard: Taking the Pulse of Bond ETFs]

“The burning question for investors is how long will the Fed remain present,” Andrew Wilkinson, chief economic strategist at Miller Tabak & Co, said in a MarketWatch article. “Signs of accelerating jobs growth will create suspicion among investors that the Fed is closer to the exit.”