As Treasury yields spiked in response to the surprisingly weak U.S. economic data, interest-rate-hedged bond exchange traded funds are beginning to shine.
The yield on benchmark 10-year Treasury notes touched a high of 2.252% Wednesday, but retreated back to 2.19% Thursday, from the recent low of 1.845% in April 17.
U.S. Treasury yields rose to their highest level this year on Wednesday, with 30-year Treasury yields crossing over 3%, after a mix of poor data that suggested the economy may have shrunk over the first quarter and higher rates overseas pressured U.S. debt.
“It was something of a one-two punch between the trade-deficit report and higher interest rates that began overseas,” Alan Gayle, senior investment strategist and director of asset allocation at RidgeWorth Investments, said in a Reuters article.
Consequently, the rising rates dragged on fixed-income assets – bond prices and yields have an inverse relationship. For instance, the iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) dipped 0.3% over the past week and was up 0.1% over the past month, and the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYESArca: LQD) declined 1.4% over the past week and fell 2.9% over the past month. [Alternative Bond ETFs for a Rising Rate Environment]
In contrast, zero-duration or interest-rate-hedged ETFs that try to negate the negative effects of higher rates have done their job and outperformed the non-hedged HYG and LQD as interest rates rose.
For instance, investors may find hedged high-yield options, including the WisdomTree BofA Merrill Lynch High Yield Bond Zero Duration Fund (NYSEArca: HYZD), ProShares High Yield Interest Rate Hedged ETF (BATS: HYHG) and Market Vectors Treasury-Hedged High Yield Bond ETF (NYSEArca: THHY), he iShares Interest Rate Hedged High Yield Bond ETF (NYSEArca: HYGH) and recently launched Deutsche X-trackers High Yield Corporate Bond – Interest Rate Hedged ETF(NYSEArca: HYIH). [Fixed-Income ETFs That Beat Interest Rate Risk]