With the debt ceiling cloud parting and the sun coming out, don’t forget the other big challenge this year. Inflation remains a significant issue and the Fed is still planning more hikes after a Fed rate pause in June. Whether the Fed does pause or not this month, investors have some powerful options that can respond to rising rates. Investors can consider ETFs including the WisdomTree Floating Rate Treasury Fund (USFR).
Let’s start with a look at the data points that have arrived to start June. Reports suggest that despite a hot jobs report, the Fed is planning to hold steady on rates for June. The May employment report showed a 339,000 jump in nonfarm payrolls, nearly double the expected 180,000 number.
Although some Fed leaders have indicated a Fed rate pause is in the cards, others have cast doubt on that suggestion. Regardless, the data together underscore an economy that is still hot in some places more than others. That bifurcation is part of what has made inflation so hard to tame, with megacap tech and firms focused on the lower end of the income spectrum doing so well.
Taken together, though, the inflation rate has subsided somewhat, its stickiness may need more hikes from the Fed. In such a scenario, USFR can perform.
The ETF tracks the Bloomberg U.S. Treasury Floating Rate Bond Index and invests in so-called “Floating Rate Notes,” or FRNs. The U.S. Treasury introduced FRNs in 2013, the first new Treasury securities since the Treasury Inflation-Protected Security (TIPS) in 1997. FRNs float, with interest payments that fluctuate according to interest rates. The Treasury holds auctions for FRNs quarterly, with USFR tied to the most recent FRN auction rates.
USFR charges 15 basis points, and is approaching its ten-year anniversary next year. USFR has added $3.4 billion in net inflows over the last six months, returning 2.1% YTD. For investors looking for an ETF that can respond to further hikes and be a safe place to hold assets, USFR can be one to watch.
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