While the equity markets turned risk-off and traders waited on the Federal Reserve’s two-day policy meeting, bond exchange traded funds strengthened with yields falling off.
The Federal Open Market Committee’s two-day meeting started Tuesday. A statement will be released after the meeting concludes on Wednesday, followed by Fed Chairman Jerome Powell’s statements where markets will be waiting on insights into how the central bank will handle its monetary policy.
“I don’t think we’re going to get any big surprises from [the Fed meeting]. Perhaps it allows some of the uncertainty to drift away a little bit. Maybe you’ll see yields go up a basis point or two, but I’m not so sure we’ll see any big moves,” Victoria Fernandez, Crossmark Global Investments’ chief market strategist, told CNBC.
Mobeen Tahir, associate director of research at WisdomTree, warned that the “narrative from central banks is evolving but not evolving fast enough.” He highlighted inflation as a persistent risk that could stay elevated for longer. The International Monetary Fund even warned inflationary pressures could prove to be more persistent.
Additionally, “volatility could be triggered by changes in monetary policy, as markets are waiting and reacting to every single announcement that the Federal Reserve makes,” Tahir told CNBC.
Looking further out, there is also the risk of a potential “taper tantrum” where the Fed is forced to “slam the brakes” on accommodative monetary policy to control inflation.
Investors looking to strengthen their fixed income strategies can consider the Avantis Core Fixed Income ETF (AVIG), which invests in a broad set of debt obligations across sectors, maturities, and issuers. AVIG pursues the benefits associated with indexing, such as diversification and transparency of exposures. Yet, the fund also has the ability to add value by making investment decisions using information embedded in current yields.
The Avantis Short-Term Fixed Income ETF (AVSF) also invests primarily in investment-grade quality debt obligations from a diverse group of U.S.- and non-U.S. issuers with a shorter maturity.
Additionally, the actively managed American Century Diversified Corporate Bond ETF (NYSEArca: KORP) invests in U.S. dollar-denominated corporate debt securities issued by U.S. and foreign entities but may also hold securities issued by supranational entities. Up to 35% of the fund’s net assets may be invested in high-yield securities or junk bonds. The fund may also invest in derivative instruments such as futures contracts and swap agreements. The weighted average duration of the fund’s portfolio is expected to be between three and seven years.
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