The Federal Reserve is widely expected to hike its benchmark interest rates or the third time this year, and some Wall street economies are even warning of the biggest tightening of monetary policy in over a decade. Nevertheless, fixed-income investors can still hedge against higher rates with targeted exchange traded fund strategies.
Economist from Citigroup and J.P. Morgan & Chase are predicting average interest rates across advanced economies may rise at minimum 1% next year, the fastest annual pace since 2006. To start off, the Fed is highly anticipated to raise rates by a quarter a percentage point Wednesday, and Fed Chair Janet Yellen is expected to signal further rate hikes in 2018.
Consequently, fixed-income investor should be prepared for 2018 being a key year for monetary normalization.
A simple way to hedge against rate risk is to incorporate a small inverse bond ETF play to a well-diversified fixed-income portfolio. For example, bond investors may take a 5% or so position to hedge against the Federal Reserve interest rate hike through simple inverse or short Treasury bond ETFs, such as the Direxion Daily 7-10 Year Treasury Bear 1x Shares (NYSEArca: TYNS), Direxion Daily 20+ Year Treasury Bear 1x Shares (NYSEArca: TYBS) or ProShares Short 20+ Year Treasury (NYSEArca: TBF).
Similarly, the Direxion Daily 20+ Year Treasury Bear 3x Shares ETF (NYSEArca: TMV), which tracks the 300% short daily performance of the NYSE 20 Year Plus Treasury Bond Index, has been popular pick for more aggressive exposure to the turns in the Treasury market. Additionally, the ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT) tries to reflect the -2x or -200% daily performance of the Barclays U.S. 20+ Year Treasury Bond Index, and the ProShares UltraPro Short 20+ Year Treasury (NYSEArca: TTT) takes the -3x or -300% daily performance of the Barclays U.S. 20+ Year Treasury Bond Index.