Investing for Rising Interest Rates Amidst High Lingering Inflation | ETF Trends

The U.S. Treasury Secretary, Janet Yellen, said yesterday that Americans should prepare themselves for another year of high inflation, reports CNBC.

The remarks come on the heels of yet another historic CPI report, with consumer prices rising 7.9% in February, the fastest rise since 1982. Treasury Secretary Yellen had told CNBC several months ago that she anticipated moderating inflation this year but has since said that Russia’s invasion of Ukraine has heavily impacted the global commodities markets.

“We have seen a very meaningful increase in gas prices, and my guess is that next month we’ll see further evidence of an impact on U.S. inflation of Putin’s war on Ukraine,” Yellen said.

Impacted commodities include oil, which has hit multi-year highs this week with the continued Russian assault of Ukraine, as well as wheat, palladium, and various other commodities that will have far-reaching price impacts.

“I think there’s a lot of uncertainty that is related to what’s going on with Russia in Ukraine. And I do think that it’s exacerbating inflation,” Yellen said. “We’re likely to see another year in which 12-month inflation numbers remain very uncomfortably high.”

With the Fed set to meet next week to determine interest rate increases in the face of continued rising inflation and the uncertainty introduced by the war in Ukraine, it will be a balancing act of working to curtail inflation while not driving the economy into a recession.

Investors Continue to Flock to USFR

For advisors and investors looking for a fund that can potentially provide rate-hedging for portfolios, the WisdomTree Floating Rate Treasury Fund (USFR) is a popular choice, bringing in $787.2 million in inflows since January 1, 2022. The fund capitalizes on the use of floating rate notes by the U.S. Treasury and can be an excellent option for investors looking to limit their amount of credit risk but still capture higher yield potentials in rising rate environments.

WisdomTree believes that floating rate debt is an important bridge between long-maturity, fixed rate Treasury Bonds and short-maturity Treasury bills. By investing in floating rate Treasuries, holders are paid out quarterly and the amount paid is based on a rate that resets daily in reference to a weekly rate. It can be a good option if Treasury bill yields are rising because it provides the opportunity for greater compensation over a fixed rate bond.

Another benefit to floating rate is that price volatility can be somewhat lessened by the daily resets when compared to fixed income bonds. Treasury floating rate notes are a good option when the yield curve is flat or inverted.

USFR seeks to track the Bloomberg U.S. Treasury Floating Rate Bond Index, which measures the performance of floating rate notes of the U.S. Treasury and contains floating rate notes with two-year maturities and a minimum outstanding amount of $1 billion. The index uses a rules-based strategy and is weighted by market cap. The index excludes fixed-rate securities, Treasury inflation-protected securities, convertible bonds, and bonds with survivor put options.

USFR carries an expense ratio of 0.15%.

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