How To Mitigate Recession Risk With Active Management

With the latest jumbo rate hike from the Federal Reserve, fixed income investors have accepted that the U.S. central bank is going to continue on its hawkish path toward fighting record-high inflation — even if there is risk of pushing the economy into recession.

The Fed implemented its third consecutive rate hike of 0.75% on Wednesday, increasing its policy interest rate to a range of 3% to 3.25%. Fed Chairman Jerome Powell said in a prepared statement that the U.S. central bank also “anticipates that ongoing increases in the target range will be appropriate.”

“If they are going meaningfully above 4% there is a strong chance of a recession,” Andrzej Skiba, head of the BlueBay U.S. fixed-income team at RBC Global Asset Management, told Bloomberg.

Impacts Reverberate to Treasuries

The day after the Fed’s announcement, two-year Treasuries dropped further on Thursday, pushing the yield four basis points higher to 4.09%. The curve between two- and 10-years plunged to -58 bps, in step with a low in August that was the deepest inversion since 1982. The 30-year yield dipped two bps lower, to 3.48%.

In addition, following the Fed’s announcement, a key piece of the curve reinverted with the 10-year yield now exceeding that of 30-year bonds for the first time since June.

“Long-maturity bonds lend credence to the Fed’s determination to get restrictive because that ensures, in the view of the bond market, a painful recession,” Ben Emons, global macro strategist with Medley Global Advisors, told Bloomberg.

With the Fed continuing to implement large rate hikes and suggesting it intends to continue down its hawkish path to fight inflation, investors may want to take a more proactive approach to investing in fixed income. That’s where an active fixed income manager can help.

Active ETFs To Mitigate Recession Risk

Passive strategies lack the flexibility to adapt to changing market environments. Meanwhile, active bond ETFs can offer the potential to outperform fixed income benchmarks and indexes.

“Managers of active ETFs are able to adjust the duration of the portfolio to reflect their updated expectations now that new information is available,” said Todd Rosenbluth, head of research at VettaFi. “They could shift to more or less rate-sensitive securities within a bond sector or take a top-down approach and realign the portfolio to maximize return potential.”

As part of its lineup of active exchange traded funds, T. Rowe Price offers a suite of actively managed fixed income ETFs, including the T. Rowe Price QM U.S. Bond ETF (TAGG), the T. Rowe Price Total Return ETF (TOTR), and the T. Rowe Price Ultra Short-Term Bond ETF (TBUX).

T. Rowe Price has been in the investing business for over 80 years through conducting field research firsthand with companies, utilizing risk management, and employing a bevy of experienced portfolio managers carrying an average of 22 years of experience.

For more news, information, and strategy, visit the Active ETF Channel.