Federal Reserve Chair Jerome Powell indicated that interest rates will hold for now in an appearance before Congress Wednesday. Investors looking to ride out the interest rate narrative would do well to consider ultra-short duration bonds for income opportunities.
The regulatory body still anticipates interest rate cuts this year, a boon for markets. However, there is not enough indication that inflation is sufficiently tamed for now according to Powell.
“The Committee does not expect that it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” said Powell, as reported by CNBC. Powell cited the need for further data as well as the uncertainty of the economy as reasons policymakers hold for now.
“We believe that our policy rate is likely at its peak for this tightening cycle,” Powell revealed. “If the economy evolves broadly as expected, it will likely be appropriate to begin dialing back policy restraint at some point this year.”
CSHI Optimizes Ultra Short-Duration Bond Allocations for Income
While interest rates remain elevated, economic uncertainty persists, and equity concentration grows, short-duration bonds still hold strong appeal. Optimizing short-duration exposures for income could prove beneficial for investors in the first half and beyond.
The NEOS Enhanced Income 1-3 Month T-Bill ETF (CSHI) seeks to deliver 100-150 basis points above what 1-3 month Treasuries are yielding. It’s noteworthy for its tax efficiency and monthly income-oriented strategy. Since January 1, net flows into CSHI have reached nearly $60 million as of 03/05/24. Last year the fund brought in $257 million in net flows.
CSHI is an actively managed ETF that seeks to generate high monthly income and is options-based. It is long on three-month Treasuries and sells out-of-the-money SPX Index put spreads. These roll weekly to account for market changes and volatility.
The fund also seeks to take advantage of tax-loss harvesting opportunities and the tax efficiency of index options. CSHI currently has a distribution yield of 6.03% and a 30-day SEC yield of 4.97% as of 02/29/2024.
The put options that the fund uses are not ETF options but instead are S&P 500 index options. These options receive favorable tax treatment as Section 1256 Contracts under IRS rules. This means the options held at the end of the year are treated as if sold on the last market day of the year at fair market value.
Any capital gains or losses are taxed as 60% long-term and 40% short-term. Notably, this tax treatment applies regardless of how long the options were held. This can offer noteworthy tax advantages, and the fund’s managers also may engage in tax-loss harvesting opportunities throughout the year on the put options. CSHI has an expense ratio of 0.38%.
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