Short-duration Treasuries and related ETFs provide attractive and relatively low-risk fixed-income exposure for bond investors.
“We expect policy normalization to lead to modestly higher long-term rates in the U.S.,” BlackRock strategists, led by Richard Turnill, said in a research note.
“Rising short-term yields price in a quarterly pace of U.S. rate hikes – and make the front end of the U.S. Treasury curve attractive for U.S. dollar-funded investors, we believe. Risks include a pause in the Fed’s rate rises due to tremors elsewhere,” the strategists added.
BlackRock anticipates a moderately rising rate environment due to the ongoing economic expansion and Fed normalization. Consequently, longer maturities are vulnerable to yield curve steepening. In such an environment, BlackRock favors shorter-duration and inflation-linked debt as buffers against rising rates and inflation.
U.S. inflation is projected to hover around the Federal Reserve’s 2% target in the short-term. The Fed has steadily hiked rates since late 2015 and is largely expected to stay on course toward a gradual normalization path through 2019.
Furthermore, the U.S. Treasury increased debt issuance to fund a rising budget deficit from tax cuts and spending increases, with issuance in the first seven months of the year already surpassing the entire 2017.
Short End Targeted ETF Plays
Nevertheless, fixed-income investors can find attract yield opportunities in the short-end of the yield curve through targeted ETF plays. For example, the iShares 1-3 Year Treasury Bond ETF (NYSEArca: SHY), which focuses on U.S. Treasury bonds with remaining maturities between one and three years, has a 1.90 year effective duration, has a 2.48% 30-day SEC yield.
The iShares 0-5 Year TIPS Bond ETF (NYSEArca: STIP), which tracks short-term U.S. TIPS or government bonds whose face value rises with inflation, has a 2.28% 30-day SEC yield and a 2.71 year duration.
Additionally, the iShares Core 1-5 Year USD Bond ETF (NYSEArca: ISTB), which includes a broad basket of U.S. dollar-denominated bonds that are rated either investment grade or high yield with remaining maturities between one and five years, has a 3.09% 30-day SEC yield and a 2.70 year duration.
For more information on U.S. government debt, visit our Treasury Bonds category.