Another month, another strong jobs report all but cemented in the probability for aggressive interest rate hikes through the end of the year for investors and markets on Friday.
September’s jobs data report came in hotter-than-anticipated on Friday, slowing but still growing, with unemployment falling marginally as the economy proves resilient despite the Fed’s aggressive rate hiking regime for most of 2022. Investor concerns around another 0.75% interest rate increase at the next Fed meeting at the beginning of November sent markets spiraling on Friday.
The markets ended their brief rally on Friday, with the Dow Jones falling over 600 points and the 10-year Treasury yield soaring back up toward recent highs.
Now volatile markets will need to contend with this quarter’s earnings season, expected to be pretty lackluster and likely extend market losses as companies begin to really show the cost of a strong dollar and persistent inflation in their bottom line. Company rhetoric and forecasts will set the tone for the last quarter of 2022 heading into the holiday season and the last two Fed meetings of the year.
“For rates to stop rising, you have this sad notion where you’re actually rooting for a recession,” Eddy Vataru, portfolio manager at Osterweis Capital Management, told the Wall Street Journal.
Advisors Choose to Take the Guesswork Out of Rate Hikes
It’s been a bad year to try and bet on interest rates: as recently as July, the Fed funds rates weren’t expected to be 3.25% by November, but another 0.75% increase at the Fed meeting November 1-2 will put the fed funds rates in a range between 3.75%-4%.
One fund riding high within fixed income this year is the WisdomTree Floating Rate Treasury Fund (USFR), an ETF that can make hedging portfolios for interest rate increases much easier for advisors and investors. In September, USFR brought in more than $1.6 billion in net flows.
The fund capitalizes on using 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 floating rate debt is an essential 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 at about 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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