The Federal Reserve will likely deliver its fourth interest rate hike of 2018 later this month, but recent commentary from Fed Chair Jerome Powell indicates the central bank could slow its pace of rate hikes next year.
With a neutral stance on rates becoming more of a reality, some intermediate-term fixed income exchange traded funds could be worth examining. That includes the iShares Intermediate-Term Corporate Bond ETF (NASDAQ: IGIB). IGIB has an effective duration of 6.15 years, according to iShares data.
In August, the underlying index for the Fund changed from the Bloomberg Barclays U.S. 1-10 year Credit Index to the ICE BofAML 5-10 Year US Corporate Index, according to iShares.
“The fund’s new bogy is cleaner (it excludes supranationals, municipal bonds, and sovereign debt, which were included in its predecessor) and more modular (when considered in the context of its similarly recast sibling exchange-traded funds) than its prior one,” said Morningstar in a note out Wednesday.
Interest In The Intermediate
Various data points indicate a neutral view on U.S. interest rates is not too far off.
“Our analysis pegs the current U.S. neutral rate at around 3.5%, a little above its long-term trend,” said BlackRock. “While uncertainty abounds over where neutral lies in the long run, our estimate sits in the middle of the 2.5% to 3.5% range identified by the Fed.”
The Federal Reserve’s rising interest rates have been a main contributing factor in the downfall of investment-grade bonds this year. As the Fed hikes the short-term fed funds rate, longer-duration investment-grade bonds with historically low yields have appeared less attractive. IGIB has a 30-day SEC yield of 4.44%.
“We currently see a rate near the top of this range needed to stabilize the U.S. economy and debt levels,” according to BlackRock. “Yet we expect the Fed to become more cautious as it nears neutral. As a result, we expect the FOMC to pause its quarterly pace of hikes amid slowing growth and inflation in 2019.”
About 91.50% of IGIB’s 1,745 holdings are rated A or BBB.
For more information on the fixed-income space, visit our bond ETFs category.