Ahead of aggressive Federal Reserve monetary policy changes, fixed income investors could turn to ultra short-duration bonds or cash-like exchange traded fund strategies that are relatively less vulnerable to interest rate risks.
Investors who are seeking cash substitutes may look to actively managed, ultra-short-duration bond ETFs that are more free to adapt holdings in a shifting market environment while generating a decent yield along the way.
For example, investors can look to funds like the PIMCO Enhanced Short Maturity ETF (NYSEArca: MINT), the Invesco Ultra Short Duration ETF (NYSEArca: GSY), the SPDR SSgA Ultra Short Term Bond ETF (NYSEArca: ULST), and the iShares Short Maturity Bond ETF (NYSEArca: NEAR). Investors should be aware that these active ultra short-term bond ETFs include corporate debt exposure with some lower quality investment-grade debt exposure, which may contribute to their relatively higher yields.
Additionally, investors can look at conservative short-duration Treasury bond ETFs, such as the iShares Short Treasury Bond ETF (NYSEArca: SHV) and the SPDR Barclays 1-3 Month T-Bill (NYSEArca: BIL).
The recent popularity for these cash-like ETFs has helped drive nearly $900 million in inflows toward the PIMCO Enhanced Short Maturity ETF, its best week of inflows since it started trading in 2009, Bloomberg reports.
The shift down the yield curve toward these ultra safe fixed income assets comes as bond yields surged, with the market projecting a 40% chance the Fed could begin rate hikes and the sharpest increase in two decades in March. The increasingly hawkish Fed bets come after an unexpectedly strong jobs report Friday reinforced speculation that the Fed could act to obviate an overheating economy. Consequently, traders are rushing to ultra short-duration funds, which have emerged as a relative haven, especially with volatility dragging down other asset classes.
“The hunt is on for anything that resembles a store of capital,” Peter Chatwell, head of multi-asset strategy at Mizuho International Plc, told Bloomberg. “What this flow shows is how the chain reaction of Fed hikes and quantitative easing will take liquidity out of ‘duration’ risk assets, into the short-duration products.”
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