1. The U.S. economy continues to show strong growth, and the Fed has indicated two additional rate hikes in 2018. As a result, short-term interest rate will continue to rise.
2. Trade uncertainty should keep a lid on longer-term rates, which means the yield curve should continue to flatten.
3. Short-term bonds have attractive yields with a lower level of interest rate risk. Given the flattening of the yield curve, short-term bond yields are at their highest since 2009, which presents value for investors as they can bear less interest rate risk while earning attractive carry.
4. The Fed has communicated recently that the current level of Fed Funds is near its neutral rate, which signals to us that the current hiking cycle is in its late stages. Diversified bond returns are close to where they usually are during the Fed tightening cycle, and given the higher yield generation due to rising yields, we expect better returns over the next few quarters.
5. Securitized markets provide yield pickup with better a better risk-reward profile than investment grade corporate bonds, which have not seen spreads widen significantly.
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This article was written by the team at Sage Advisory, a participant in the ETF Strategist Channel.