Investors Flock to Short Duration Bond ETFs as Producer Prices Rise

For the month of September, the Labor Department revealed that the core producer price index (PPI) increased by 0.2%, which was in line with expectations from a Reuters poll of economists. Furthermore, the PPI rose 2.5% in the 12 months through September, which also matched expectations.

“This latest inflation data corroborates our view that the Fed is likely to move ahead with another rate hike in December, bringing this year’s total to four,” economists at Oxford Economics wrote.

Core PPI is key indicator for underlying producer price pressures, excluding food and energy costs. The Federal Reserve uses the PPI data as a measure of inflation where producers who are paying more for goods may translate to higher prices for consumers.

Related: Manage Inflation Expectations With ‘RINF’ ETF

The latest inflation data comes as Treasury yields have been climbing in addition to rising interest rates, causing investors to flock to shorter-duration debt issues as opposed to those with longer maturities.

“We’ve seen general selling in medium to long duration bonds for a few weeks with clients going into cash, equities, and very short duration ETFs,” said Joseph LaGrasta, ETF Sales & Trading at Virtu Financial.

Playing the Short Game

With the short-term rate adjustments being instituted by the Federal Reserve, investors can limit exposure to long-term debt issues and focus on maturity profiles. An example would be the SPDR Portfolio Short Term Corp Bd ETF (NYSEArca: SPSB), which seeks to provide investment results that correspond to the performance of the Bloomberg Barclays U.S. 1-3 Year Corporate Bond Index.