The ascent of benchmark Treasury yields continued today as the Labor Department revealed that job growth in the month of September slid to its lowest level in the past year, which was coupled with the unemployment rate falling to its lowest level in almost 50 years. As the Dow Jones Industrial Average fell almost 300 points as of 1:30 p.m. ET, benchmark Treasury yields continued their weeklong ascent with the 10-year note hitting 3.237 and the 30-year settling to 3.403.
“A nice spike in U.S. yields is just what markets needed, given how quiet things had got lately. Volatility has been trending lower all year, so a little rerun of the January panic over U.S. inflation and yields would clear the deck nicely for an autumn rally in equities,” said Chris Beauchamp, Chief Market Analyst at IG.
Nonfarm payrolls gained 134,000, which was over 50,000 jobs below the Refinitiv estimates of 185,000. However, the unemployment rate fell to 3.7 percent, which was one-tenth of a percentage below initial forecasts.
Furthermore, the average hourly earnings data showed a 2.8% year-over-year increase, which matched initial expectations, while the average work week came in at a static 34.5 hours.
“Despite a modestly lower headline, and noise from Hurricane Florence, today’s payroll data continued a trend of remarkably strong labor markets, particularly when upward revisions and a longer-term outlook are considered,” said Rick Rieder, BlackRock’s Chief Investment Officer of Global Fixed Income, in an email.
According to Robeco fund manager Jeroen Blokland, the strong economic data paired with a rise in yields is par for course in normalizing monetary policy.
“However, the last couple of days the rise in yields has been fast and a bit unexpected. Most investors seem to be positioned for a decrease in yields. Fast rising rates brings corporate debt sustainability into play,” said Blokland.
“So if rates keep rising like this I expect volatility in equity markets, but as long as they don’t ramp up to let’s say 4% or so, I think this should be seen as positive. Also the yield curve is steepening, reducing recession odds,” Blokland added.
With benchmark Treasury yields rising and depressing government debt prices, here are three fixed-income ETFs to take advantage of this rising yield landscape.
1. Xtrackers Hi Yld Cor Bd Intst Rt Hdg ETF (BATS: HYIH)
HYIH seeks investment results that correspond generally to the performance of the Solactive High Yield Corporate Bond-Interest Rate Hedged Index–more high yield to appease Axelrod’s appetite for risk. HYIH will invest at least 80% of its total assetsin instruments that comprise the underlying index, such as long positions in U.S. dollar-denominated high yield corporate bonds and shorts in U.S. Treasury notes or bonds of approximate equivalent duration to the high yield bonds.
2. ProShares High Yield—Interest Rate Hdgd (BATS: HYHG)
HYHG tracks the performance of the Citi High Yield (Treasury Rate-Hedged) Index and allocates 80% of its total assets in high-yield bonds and short positions in Treasury Securities in order hedge against rising rates. Because HYHG invests in high-yield bonds, there is credit risk associated with the higher yield since the fund invests in corporate issues that are less than investment-grade, but by targeting a duration of zero, HYHG offers less interest rate sensitivity versus its short-term bond peers.
3. WisdomTree Interest Rt Hdg Hi Yld Bd ETF (NasdaqGM: HYZD)
HYZD seeks to track the price and yield performance of the BofA Merrill Lynch 0-5 Year U.S. High Yield Constrained, Zero Duration Index, which provides long exposure to the BofA Merrill Lynch 0-5 Year U.S. High Yield Constrained Index while seeking to manage interest rate risk through the use of short positions in U.S. Treasury securities. The majority of the fund’s total assets will be invested in the component securities of the index and investments that have economic characteristics that are similar in nature.
For more trends in fixed income, visit the Fixed Income Channel.