Adding Some Spice to a Boring, But Popular Bond Trade

By Todd Shriber via

As of the end of October, the Federal Reserve hiked interest rates three times this year with many fixed income market participants still betting on a fourth rate increase coming in December. A predictable reaction of the Fed’s 2018 tightening efforts is investors departing long-dated bonds and the related exchange traded funds (ETFs) in favor of lower duration alternatives.

On a year-to-date basis, the two top bond ETFs in terms of assets added are a short duration Treasury fund and a floating rate fund. That theme is continuing the fourth quarter where the top asset-gathering fixed income ETFs are of the ultra-short variety.

In many cases, trimming duration also means reducing yield. For example, the ICE U.S. Treasury Short Bond Index and the Bloomberg Barclays 1-3 Month U.S. Treasury Bill Index have 30-day SEC yields of just 2.15 percent and 1.96 percent, respectively.

Fixed income investors looking to manage interest rate risk while still maintaining a decent income profile can consider short-dated and ultra-short municipal bonds. Until recently, there were no ETFs dedicated to ultra-short municipal bonds. The JPMorgan Ultra-Short Municipal ETF (JMSTchanged that.

Actively managed, the JMST holds 214 municipal bonds, comprised primarily of investment-grade fixed, floating-rate and variable-rate securities.

Good Timing

Broadly speaking, municipal bond strategies have been better than longer duration bond funds this year. In this case, “better” means “less bad.” The S&P National AMT-Free Municipal Bond Index, which has an effective duration of 6.14 years, is lower by nearly 1.20 percent this year.

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