“I think they shouldn’t raise them this week. The bond market is basically saying, ‘Fed you’ve got no way you should be raising interest rates.’ Look at the twos, threes, five-year part of the yield curve, which are flat at 2.7 percent,” Gundlach said. “The problem though isn’t that the Fed shouldn’t be raising rates. The problem is that the Fed shouldn’t have kept them so low for so long.”
Floating Rate ETFs
With the possibility of a forthcoming rate hike, bond investors can incorporate fixed-income exchange-traded funds (ETFs) into their portfolios that can adjust with or nullify the impact of rising rates. While bonds with floating rate notes are the typical go-to for fixed-income investors, it is also helpful to opt for short duration debt to minimize exposure to interest rate risk.
ETFs to consider include the SPDR Bloomberg Barclays Investment Grade Floating Rate ETF (NYSEArca: FLRN) and the iShares Floating Rate Bond ETF (BATS: FLOT). The floating rate allows investors to capitalize on any short-term interest rate adjustments in accordance with monetary policy.
FLRN seeks to provide investment results that correlate with the price and yield performance of the Bloomberg Barclays U.S. Dollar Floating Rate Note < 5 Years Index, and limits duration exposure with investments in debt securities with maturities that don’t exceed five years. FLOT also seeks to track the investment results of the Bloomberg Barclays US Floating Rate Note < 5 Years Index, and invests in the component securities of the underlying index and may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents, as well as in securities not included in the underlying index.
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