The world’s biggest wealth fund is betting on bond yields further rising. Fixed-income investors who feel similarly anxious over rising yields and the negative effect on prices may consider a few bond exchange traded fund strategies to diminish rising rate risks.
Norway’s $1 trillion sovereign wealth fund is positioning for rising bond yields, taking on an overweight position in the shorter bond maturities as the U.S. 10-year Treasury yield broke through the 3% threshold for the first time since 2014, Bloomberg reports.
The overweight short-term bond exposure is meant to make the portfolio less sensitive to a general increase in yields than the benchmark it follows. Norway’s fund held $75 billion U.S. Treasuries at the end of the first quarter.
“There’s been a lot of focus on U.S. interest rates, but in the other main markets, it’s been pretty stable, you haven’t had the big rate changes,” Yngve Slyngstad, the chief executive officer of Norges Bank Investment Management, told BLoomberg. “Monetary policy is in a different cycle than Europe and Japan, especially.”
Related – Bond ETFs: Smooth Operators Amidst Volatility
Bond ETF investors can also diminish their rate risk by shifting down the yield curve toward short duration bond ETFs. For example, the iShares 1-3 Year Treasury Bond ETF (NYSEArca: SHY) and SPDR Barclays 1-3 Month T-Bill (NYSEArca: BIL) have been popular Treasury bond ETF plays this year as bond investors adapt to a changing interest rate outlook. Year-to-date, SHY experienced $1.1 billion in net inflows while BIL attracted $1.4 billion in net inflows, according to XTF data.
SHY shows a 2.23% 30-day SEC yield and a 1.84 year effective duration. BIL has a 1.49% 30-day SEC yield and a 0.09 year duration. Duration is a measure of a bond fund’s sensitivity to changes in interest rates, so a low duration corresponds with lower sensitivity – a 1% rise in interest rates would translate to about a 1.84% decline in SHY and a 0.09% drop in BIL.
More aggressive traders may also incorporate a small bearish or inverse bond ETF strategy to a diversified fixed-income portfolio, such as the ProShares Short 20+ Year Treasury (NYSEArca: TBF), ProShares UltraShort 20+ Year Treasury (NYSEArca: TBT), ProShares UltraPro Short 20+ Year Treasury (NYSEArca: TTT) and Direxion Daily 20-Year Treasury Bear 3X (NYSEArca: TMV).
For more information on the fixed-income markets, visit our bond ETFs category.