For high-yield corporate bond investors who thought the recent consumer price index report would get the Federal Reserve to ease up on the gas with raising interest rates, one voting member of the Federal Open Market Committee is saying not so fast.
St. Louis Federal Reserve President James Bullard said Thursday that the U.S. central bank hasn’t done nearly enough to bring inflation down. “Thus far, the change in the monetary policy stance appears to have had only limited effects on observed inflation, but market pricing suggests disinflation is expected in 2023,” he said, adding that “the policy rate is not yet… sufficiently restrictive.”
Bullard added: “To attain a sufficiently restrictive level, the policy rate will need to be increased further.”
The latest CPI report showed that consumer prices rose 0.4% for the month and 7.7% for the 12 months ending October 31, lower than Wall Street estimates. This gave investors hope that the Fed would be less hawkish when raising interest rates going forward.
The Fed raised the target range for the federal funds rate by 75 basis points this month, marking the sixth consecutive rate hike and the fourth increase of 0.75%. The FOMC will meet on December 13-14. Analysts expect the U.S. central bank will approve another rate hike, but this time increasing by 50 basis points rather than another 0.75% raise.
With inflation still high and the Fed indicating that it plans to continue raising interest rates, investors seeking exposure to U.S. dollar high-yield corporate bonds will want strong risk controls. That’s where the Xtrackers Risk Managed USD High Yield Strategy ETF (NYSE Arca: HYRM) can come into play.
HYRM tracks the Adaptive Wealth Strategies Risk Managed High Yield Index, which uses a daily algorithm to dynamically adjust exposure between bonds and cash equivalent investments. The fund is designed to track the performance of the U.S. dollar-denominated high-yield corporate bond market during normal market conditions, and the performance of a U.S. dollar cash position (accruing interest at the Effective Federal Funds Rate) during periods of adverse market conditions.
The underlying index uses a rules-based allocation mechanism to allocate between either 100% exposure to the Solactive USD High Yield Corporates Total Market Index or 100% exposure to the Solactive Fed Funds Effective Rate Total Return Index, based on quantitative market risk signals derived from measurements of price changes in the market.
When the fund was launched in February, Michael Curtis, head of U.S. passive product, said in a press release that “HYRM may be an interesting way for investors to gain exposure to the USD high yield bond market with a built-in risk-management process,” before adding, “downside, or drawdown risks, are a key factor when allocating to high yield bonds, which the allocation mechanism of HYRM’s underlying index seeks to address effectively.”
The ETF has an expense ratio of 0.30%.
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