Treasury yields are climbing at the fastest rate in two decades, with the 10-year Treasury yield hitting as high as 1.71% on Tuesday January 4, 2022, reports CNBC. The spike reflects a move away from the haven of Treasuries by investors who feel more confident regarding Omicron’s impacts.

The Fed has tightened its policy and plans to end tapering in March this year, paving the way for interest rate increases to battle historic inflation. Forecasts point to three incremental interest rate increases this year, though many strategists do not anticipate that Treasury yields will top much higher than 2%.

If inflation proves hard to manage, however, the Fed will have to get more aggressive on its policies, which could have wider impacts across markets. For now, there is uncertainty as investors bounce between equity performance and inflationary fears.

“The one big takeaway I would say for readers should have is that 2022 will be a challenging year, but the U.S. will still be growing at an expected 4% next year. That’s still significantly higher than our long-run average, around 2%. So the growth has been delayed, not derailed,” said Franco Ditri, investment specialist for T. Rowe Price’s fixed income division in a recent interview with ETF Trends. “We do expect inflation to decline. We know spreads are tight, but there is opportunity out there to still generate income in the fixed income market, if you take a look at your allocations, give managers some flexibility, and then let the positioning do the rest.”

TOTR Offers Flexibility in Changing Market Conditions

Active management firm T. Rowe Price launched a new ETF in the second half of last year that can help take some of the worry out of bond investment and the need to constantly track fluctuating market environments. The T. Rowe Price Total Return ETF (TOTR) seeks to offer maximum returns for investors primarily through income, as well as capital appreciation by investing in a diverse set of bonds and debt instruments.

TOTR is constructed to be flexible in changing market conditions while still seeking strong returns. The fund primarily invests in U.S. intermediate-term bonds but has the freedom to purchase bonds from across the global opportunity set and maturity spectrum. Examples might include debt securities issued by the U.S. government and its agencies, corporate bonds, bank loans, and various types of mortgage-backed and asset-backed securities.

The fund can invest up to 35% of its net assets in junk bonds, and 20% of the fund can be invested in non-U.S. dollar-denominated holdings, but there is no limit to the amount that can be invested in foreign issuers offering U.S. dollar-denominated securities.

TOTR can also use interest rate futures, interest rate swaps, credit default swaps, currency swaps, forward currency exchange contracts, and options on any of the previous instruments to gain or limit exposure to areas of the market and manage duration, per the prospectus.

The fund has no maturity restrictions for the portfolio, and the maturity and duration will change according to market conditions and both current and expected interest rates. The advisor takes into account the inflation and economic outlook, expected interest rate changes, credit conditions, and yield advantages when deploying or adjusting allocations for the fund.

It’s important to note that, as with most bond investments, the yield and share price will fluctuate according to interest rate changes, and in the case of high interest rate increases, total returns will diminish and could turn negative in the short term. In large yield difference environments, the fund can move down the credit scale and be more concentrated in junk bonds and emerging market bonds, while in smaller yield environments, the fund may concentrate its investments in Treasury securities and those securities with higher ratings.

An important aspect of the management process will be ongoing evaluation of risk exposures, making tactical adjustments as market conditions evolve. To this end, the strategy’s investment guidelines provide the management team with substantial flexibility.

Unlike most indexed or passive strategies, TOTR has the broad latitude to adapt to changing markets through an actively managed portfolio.

TOTR carries an expense ratio of 0.31% and is actively managed.

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