The forecast of rising rates is akin to predicting rain in Seattle, Washington — it’s coming at some point. Adding short duration to a bond portfolio can be ideal in the current market.
The U.S. Federal Reserve just raised the federal funds rate by 25 basis points, but the capital markets are bracing themselves for more. More rate hikes are expected, with inflation running hotter than an Arizona desert in August.
“With inflation likely to be very strong in March…and to remain elevated in April, we think it will be hard for Fed officials to argue why they would not raise 50 [basis points],” Citi economists wrote, according to a CNN article.
In terms of speed, rate hikes appear to be coming at a fast pace, given the Fed’s recent comments. In other words, it could be best to bet on the higher end of the hawkishness scale.
“There is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level,” Fed Chair Jerome Powell said during a National Association for Business Economics event.
An Active Take on Short Duration
To help mitigate forthcoming rate risk, bond investors can opt for short duration. With more than a bevy of options available in the short-term debt market, it might be best to put a professional in the driver’s seat.
That said, investors can also opt for an actively managed fund that focuses on short duration debt. One such actively managed ETF is the T. Rowe Price Ultra Short-Term Bond ETF (TBUX).
TBUX seeks high levels of income that are consistent with low volatility of principal value by investing primarily in investment-grade, short-term securities. The fund’s fact sheet shows that the portfolio’s dollar-weighted effective maturity is generally expected to be 1.5 years or less.
Even with an actively managed portfolio built on fundamental analysis, TBUX can still deliver a competitive 0.17% expense ratio. Assets are never held in overly concentrated exposures, but instead use a diverse portfolio spread across investment-grade U.S corporate bonds, treasuries, and reserve assets.
For more news, information, and strategy, visit the Active ETF Channel.