Hedged Bond ETFs Outperform as Treasury Yields Rise

With Treasury yields regaining ground as market volatility dissipates and inflation expectations rise, rate-hedged bond exchange traded funds are beginning to outperform.

The yield on benchmark 10-year Treasuries are back to 1.92% Monday, compared to a low of 1.567% in mid-February. Treasuries continued to slip Monday as yields pushed higher after two Federal Reserve officials revealed bullish projections on inflation, reports Caren Brettell for Reuters. Higher inflation makes fixed-income assets less attractive due to their lower real yield, or yield after inflation.

Richmond Fed President Jeffrey Lacker argued that inflation will likely accelerate in the coming years and move toward the Federal Reserve’s 2% target. San Francisco Fed President John Williams also told Market News International that he would push for another interest rate hike as early as the April meeting, citing “very encouraging” inflation rates.

Consequently, as Treasury yields rose, 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 bond funds.