The highly anticipated Federal Reserve meeting happens today in which the Fed will be announcing the interest rate increase for June. The central bank had previously indicated a 0.50% increase as likely for June and July, but May’s CPI report of historically high inflation has cast doubts in the minds of analysts, advisors, and investors.
Headlines since Friday’s announcement of the 8.6% CPI for May have openly entertained the idea of a 0.75% rate increase, and the potential for a more aggressive rate hike aligns with the verbiage that has come from Fed officials this summer.
“This is not a time for tremendously nuanced readings of inflation,” Federal Reserve Chair Jerome Powell said in a live streamed interview in May at Wall Street Journal’s Future of Everything Festival. “We need to see inflation coming down in a convincing way. Until we do, we’ll keep going.”
The Fed has made clear that it is willing to drive the economy into a recession if necessary to tame inflation. Markets responded negatively on Friday to the inflation report, with the S&P 500 sliding once more into bear market territory Monday and Tuesday.
Investors’ sentiment and fears have been a big driver of market movement in 2022, with market volatility often directly linked to any reports released concerning inflation and the job market this year.
“This Environment Is USFR’s Environment”
It’s created an environment where many advisors and investors are finding themselves trying to predict Fed interest rate hikes to align their portfolios, but the WisdomTree Floating Rate Treasury Fund (USFR) can take the guesswork out of hedging portfolios for interest rate increases.
It’s a fund that “tends to stair step up with the Fed,” explained Jeff Weniger, CFA and head of equity strategy at WisdomTree, in a recent call with VettaFi.
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.
“Every product has its environment, right? And this environment is USFR’s environment,” said Scott Welch, CIMA, and CIO of model portfolios at WisdomTree. From May 1 through May 31, 2022, USFR brought in net inflows of $1.8 billion.
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 a floating rate is that price volatility can be somewhat lessened by the weekly 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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