While the recent January jobs report brings hope that the U.S. economy could stave off a potential recession in 2023, it also breeds worry that interest rates could stay elevated for longer than the capital markets expect. As such, investors will need a short-term rate strategy in their bond portfolio.
2022 was certainly a year to forget for the bond markets as all debt issues across the board felt the weight of higher interest rates. Near the tail end of the year, markets began to rally on the hopes that the U.S. Federal Reserve would tame inflation domestically, and central banks globally would follow suit with a slowdown in rate hikes.
With the first month of 2023 on the books, it appears the job market is off to a scorching start. This certainly warrants a healthy dose of optimism with respect to economic growth, but on the flip side, it could also mean the notion of fewer rate hikes could be in jeopardy.
“Employers hired ravenously in January, adding 517,000 workers,” wrote in the New York Times. “The jobless rate dipped to a level not seen since 1969, and revisions to last year’s data showed that job growth was even stronger in 2021 and 2022 than previously understood — all signs that the demand for labor is booming.”
For the bond markets, more rate hikes is the last thing on the agenda. Higher interest rates could eat into bond income, which could put downward pressure on the bond market once again if fixed income investors start to worry and sell off bonds again.
“The biggest surprise — and the thing to take the most signal from — is the combination of the job gains over the past month and the restatement over the past year,” said Thomas Barkin, the president of the Federal Reserve Bank of Richmond. “We still have more to do. Inflation is the guidepost.”
Get Yield With a Short-Term Focus
Investors don’t have to shy away from bonds completely. A short-term duration strategy could help mute the effects of any rate hikes should the Fed continue an aggressive path with monetary policy tightening.
That said, investors should consider the WisdomTree Yield Enhanced U.S. Short-Term Aggregate Bond Fund (SHAG). SHAG seeks to track the price and yield performance of the Bloomberg Barclays U.S. Short Aggregate Enhanced Yield Index, which is designed to broadly capture the short-term U.S. investment grade, fixed income securities market while seeking to enhance yield within desired risk parameters and constraints.
Corporate bonds can offer investors more yield as long as they’re willing to accept more risk. As such, another fund worth considering is the WisdomTree U.S. Short Term Corporate Bond Fund (SFIG), which seeks to track the performance of select issuers in the short-term U.S. investment grade corporate bond market that are deemed to exhibit favorable fundamentals and opportunities for income.
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