Rising Treasury yields are still a daunting consideration for advisors, a scenario could be in play longer than many would like.
The WisdomTree Fixed Income Model Portfolio can help advisors deal with rising rates, potentially improving clients’ fixed income outcomes in the process.
“This model portfolio is focused on a diversified stream of income. It seeks to benefit from secular trends we see evolving in the fixed income markets in a risk-conscious manner. The model portfolio focuses on select opportunities in core sectors, while strategically allocating among sectors and extending the model portfolio’s reach globally,” according to WisdomTree.
The WisdomTree Fixed Income Model Portfolio features eight ETFs with varying credit qualities and durations. With budget deficits beyond bloated, the model portfolio is worth considering today.
“The U.S. yield curve steepened dramatically over the past several months, driven by expectations for an improving economy, massive fiscal stimulus and a continuation of accommodative monetary policy,” according to WisdomTree research. “To provide some perspective, the rise in the UST 10-Year yield began early last August when the all-time low watermark of 0.51% registered on August 4. Since that date, the rate increase has been an eye-opening 120 basis points (bps) through March 18. However, the development getting the lion’s share of attention is what has transpired so far this year, where the rise has been a whopping 78 bps.”
Navigating an Increasingly Tricky Bond Market
Many investors are unaware of the grave risks that rising interest rates pose to their bond portfolios. The recent rise in interest rates has hurt fixed income ETFs, especially funds tracking Treasuries with longer durations.
With interest rates jumping to a one-year high off of historic lows, bond exchange traded fund investors may need the benefits offered by WisdomTree’s model portfolio. The model portfolio features some quality corporate debt exposure, which is relevant today.
The federal government backstopping U.S. corporate debt during the height of the pandemic gave the bond markets a nice boost, and some hedge funds are expecting that the party isn’t over just yet. Some funds are doubling down on corporate bonds, particularly the riskier and longer duration variety.
“Despite the higher current income available from bond allocations, we view the total return risk to be much higher in the bond market. In our base case outlook, we believe rates will continue to grind higher, resulting in a further steepening of the yield curve. Credit spreads could also continue to tighten, but the runway from present levels is a shrinking one,” finishes WisdomTree.
For more on how to implement model portfolios, visit our Model Portfolio Channel.
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.
