The end of June’s FOMC meeting on Wednesday also brought news that the Fed would pause its rate hikes this month. The announcement confirmed reports and market speculation that the economy would be spared another tightening. That said, despite June’s pause, the central bank did emphasize that further hot economic data and inflation numbers would invite more hikes.
According to projections and forecasts from the FOMC, two more hikes could be coming just this year. That undercuts previous market hope that the economy could even anticipate a rate “cut” in 2023. Indeed, the Fed’s dot plot has now jumped from 5.1% to 5.6%.
All of these signals and moves come following drops in some inflation-related metrics, including the Producer Price Index (PPI). For those who hope for an end to the overall rate hike campaign at the Fed, that’s positive news.
So what strategies or investment areas might fit such news? Intermediate-term bond ETFs stand out as an option, starting with the WisdomTree U.S. High Yield Corporate Bond Fund (WFHY). WFHY tracks the WisdomTree Fundamental U.S. High Yield Corporate Bond Index for a 38 basis point fee. The ETF cuts down a high yield, U.S.-domiciled universe based on free cash flows to equity and probabilities of default. WFHY has returned 2.9% YTD, with $8.8 million in three-month net inflows.
Why intermediate bonds? Whereas short-term and ultra-short bonds tend to benefit from rate hikes because their bonds can ride those higher rates before another hike, intermediates operate differently. In this pause scenario, those short term bonds become less appealing compared to locking in some of the best yields out there, available in intermediate term bonds. What’s more, a pause suggests a possible cut in a recession. Rate cuts increase bond prices, especially for longer dated bonds. That helps intermediates compared to short duration.
See more: “As Fed Rate Pause Previews Hikes, Eye USFR”
Investors have other options to look out for, too. The Vanguard Intermediate-Term Corporate Bond ETF (VCIT) presents an alternative to the more high yield-minded WFHY. VCIT charges just four basis points to track the Bloomberg US Aggregate Credit – Corporate (5-10 Y). VCIT offers exposure to middle maturity corporate bonds, with a moderate amount of credit and rate risk. The ETF has returned 2.6% YTD.
For more news, information, and analysis, visit the Modern Alpha Channel.
