Asset Classes

Free investment financial education

Language

Multilingual content from IBKR

Close Navigation
Learn more about IBKR accounts

Rates Rising…Who You Gonna Call?

Posted October 28, 2021 at 11:45 am
Kevin Flanagan
WisdomTree U.S.

With Halloween less than a week away, investors are wondering if the bond market will be giving out tricks or treats. If recent trading activity is any guide, it looks like things are getting rather “spooky,” as U.S. Treasury (UST) yields are rising all across the coupon curve, bringing absolute levels back to pre-pandemic levels in some cases. So, in order to obtain some potential future rate protection (and in honor of the time of year we’re in), I have to ask the question: who you gonna call?

Based upon recent inflows, it looks like one rate-hedge solutions are being sought. Indeed, just last week one of our funds saw more than $600 million of inflows. Interestingly, this buying activity was juxtaposed against most other UST-based securities witnessing visible selling pressure, including TIPS and short-duration fixed coupon Treasuries. 

Let’s take a look at the rate backdrop for a minute. In my blog post from last week, “Five and Dime,” I discussed how other parts of the Treasury market, namely the 2-year and 5-year sectors, had joined the 10-year maturity into higher yield territory. That trend was certainly built upon last week, highlighted by a 2-year yield at roughly 0.50%, a 5-year at 1.20% and the 10-year hitting the 1.70% threshold.

What’s at the root cause, you might ask? It has become increasingly apparent the collective market is becoming more concerned about inflation. Indeed, the five-year breakeven spread (a widely watched measure of inflation expectations) rose to just under +300 basis points (bps), its highest reading since 2005. In addition, the outlook for future Federal Reserve (Fed) policy has also become less friendly for Treasuries. Sure, a tapering announcement at next week’s FOMC meeting has been built in for awhile now, but as we’ve discussed on many occasions, the market’s attention has quickly turned to the next phase of the policy maker’s exit strategy, rate hikes. As of this writing, Fed Funds Futures have now essentially “priced in” two Fed rate increases for next year. Remember earlier this year when “taper talk” was just “talk” and virtually no one was thinking about rate hikes? My, have things changed!

Conclusion

Given the recent trading activity in the Treasury space, one could argue that investors appear to be starting the process of preparing their bond portfolios for further increases in rates. The intriguing aspect to all of this is that the Fed hasn’t even moved toward “liftoff” quite yet. The natural question becomes what happens when the Fed actually does begin to raise rates? My suggestion: don’t wait that long.

Originally Posted on October 27, 2021 – Rates Rising…Who You Gonna Call?

Important Risks Related to this Article

There are risks associated with investing, including possible loss of principal. Securities with floating rates can be less sensitive to interest rate changes than securities with fixed interest rates, but may decline in value. The issuance of floating rate notes by the U.S. Treasury is new, and the amount of supply will be limited. Fixed income securities will normally decline in value as interest rates rise. The value of an investment in the Fund may change quickly and without warning in response to issuer or counterparty defaults and changes in the credit ratings of the Fund’s portfolio investments. Due to the investment strategy of this Fund, it may make higher capital gain distributions than other ETFs. Please read the Fund’s prospectus for specific details regarding the Fund’s risk profile.

Disclosure: WisdomTree U.S.

Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. U.S. investors only: To obtain a prospectus containing this and other important information, please call 866.909.WISE (9473) or click here to view or download a prospectus online. Read the prospectus carefully before you invest. There are risks involved with investing, including the possible loss of principal. Past performance does not guarantee future results.

You cannot invest directly in an index.

Foreign investing involves currency, political and economic risk. Funds focusing on a single country, sector and/or funds that emphasize investments in smaller companies may experience greater price volatility. Investments in emerging markets, real estate, currency, fixed income and alternative investments include additional risks. Due to the investment strategy of certain Funds, they may make higher capital gain distributions than other ETFs. Please see prospectus for discussion of risks.

WisdomTree Funds are distributed by Foreside Fund Services, LLC, in the U.S. only.

Interactive Advisors offers two portfolios powered by WisdomTree: the WisdomTree Aggressive and WisdomTree Moderately Aggressive with Alts portfolios.

Disclosure: Interactive Brokers

Information posted on IBKR Campus that is provided by third-parties does NOT constitute a recommendation that you should contract for the services of that third party. Third-party participants who contribute to IBKR Campus are independent of Interactive Brokers and Interactive Brokers does not make any representations or warranties concerning the services offered, their past or future performance, or the accuracy of the information provided by the third party. Past performance is no guarantee of future results.

This material is from WisdomTree U.S. and is being posted with its permission. The views expressed in this material are solely those of the author and/or WisdomTree U.S. and Interactive Brokers is not endorsing or recommending any investment or trading discussed in the material. This material is not and should not be construed as an offer to buy or sell any security. It should not be construed as research or investment advice or a recommendation to buy, sell or hold any security or commodity. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

IBKR Campus Newsletters

This website uses cookies to collect usage information in order to offer a better browsing experience. By browsing this site or by clicking on the "ACCEPT COOKIES" button you accept our Cookie Policy.