Don’t Ignore Continued Case for Treasuries in USFR | ETF Trends

Is the rate cycle really coming to an end? That’s what some market watchers are anticipating, some at least predicting a pause in September. Others see cooling inflation and some slowing economic indicators as sufficient evidence of a rate hike stop. Still, the Fed keeps its cards close to the chest and some governors have pushed back on a September pause. As investors continue to eye rising yields, they may want to keep an eye on Treasuries in a floating rate format available in USFR.

This week, market rate watchers will turn their gaze towards Jackson Hole, Wyoming. The ski resort and conference town will see Fed Chair Jerome Powell offer his latest thoughts on whether the economy needs further hikes. Stocks had already fallen Thursday, even before Powell’s Friday remarks.

Taken together, even while inflation has cooled, the economy remains robust and another hike remains in the cards. Should such a hike take place, it would throw yet another curve ball at the fixed income space. Even a further 25 basis point (bps) hike would impact existing longer duration products despite their appealing yields.

See more: Short Duration Fixed Income Model Portfolio: Keep the Income, Lose the Volatility

That may boost the case for a floating rate treasuries ETF that benefits when rates rise. One such strategy may be the WisdomTree Floating Rate Treasury Fund (USFR). USFR tracks a market-value-weighted index of floating rate notes (FRNs). FRNs are the latest Treasury products introduced to the market, resetting their coupon rate on a weekly basis. FRNs reset their rate based on the most recent 90-day T-bill auction.

Given that FRNs respond to rate hikes, they can benefit from another rate hike this Fall. By investing in this variety of treasuries, investors can get solid, very competitive yields. USFR itself charges 15 bps, returning 3.4% YTD. That outdoes the ETF Database Category Average by nearly 300 bps. The ETF has picked up more than half a billion in flows over the last month, as well. USFR itself offers a 550 bps yield to maturity, too. Overall, it may be worth a look as the Fed considers further hikes.

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