The U.S. capital markets are bracing themselves ahead of a Federal Reserve interest rate decision set to take place on Wednesday as it is widely expected that the central bank will continue their tightening with another rate hike to temper economic growth. In the meantime, benchmark Treasury yields ticked higher–the 10-year rose to 3.104 and the 30-year yield ticked up to 3.237.
The Fed began its two-day monetary policy meeting today, which will probably include a bevy of data presented that shows the economy is moving forward strength to strength, including an extended bull stock market run that has already seen major indexes like the S&P 500 reach record levels with companies like Apple and Amazon reaching the $1 trillion market capitalization level. Just recently, J.P. Morgan Chase CEO Jamie Dimon reaffirmed the forward momentum of the current bull market as he cited that the economy will sustain its fortuitous path of growth without any obstructions ahead.
“In America, the economy is quite strong. It’s growing at 3 percent. And it has been now for a couple of quarters,” said Dimon. “There are no great potholes. So that may very well continue.”
Since the installment of U.S. President Donald Trump’s administration, the country’s gross domestic product has grown by an average of 2.7% per quarter. Furthermore, the final estimate for second-quarter GDP is expected to show a revision of 4.3% growth, while the third quarter growth is forecasted to come in around 3.3%.
“Fed funds increases in September and December are as certain as certain can be,” John Donaldson, director of fixed income at Haverford Trust, wrote in his response to the survey. “Their real challenge starts after the first increase in 2019, which will bring the rate to 2.75 percent, or finally back to even to inflation.”
Related: Survey Unanimous Fed will Raise Rates Twice More this Year
Rate-Hedged Fixed-Income ETF Moves
The rise in the benchmark yields may have caused a move to fixed-income ETFs with rate-hedged strategies like the WisdomTree Interest Rt Hdg Hi Yld Bd ETF (NasdaqGM: HYZD). HYZD rose 0.53% as of 12:30 p.m. ET, and is up 2.86% year-to-date and 5.73% the past year.
HYZD seeks to track the price and yield performance of the BofA Merrill Lynch 0-5 Year U.S. High Yield Constrained, Zero Duration Index, which provides long exposure to the BofA Merrill Lynch 0-5 Year U.S. High Yield Constrained Index while seeking to manage interest rate risk through the use of short positions in, you guessed it, U.S. Treasury securities. The majority of the fund’s total assets will be invested in the component securities of the index and investments that have economic characteristics that are similar in nature.
“We finally have a real interest rate, not one that’s just zero,” said Craig Birk, chief investment officer of Personal Capital. “The Fed is still saying that they will likely raise rates slowly and steadily but the market seems to be betting they will stop sooner.”
For more trends in fixed income, visit the Fixed Income Channel.