{"id":109024,"date":"2021-10-28T11:45:00","date_gmt":"2021-10-28T15:45:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/?p=109024"},"modified":"2022-11-21T09:48:50","modified_gmt":"2022-11-21T14:48:50","slug":"rates-rising-who-you-gonna-call","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/fixed-income\/rates-rising-who-you-gonna-call\/","title":{"rendered":"Rates Rising…Who You Gonna Call?"},"content":{"rendered":"\n

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 \u201cspooky,\u201d as U.S. Treasury (UST) yields<\/a> are rising all across the coupon<\/a> 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\u2019re in), I have to ask the question: who you gonna call?<\/p>\n\n\n\n

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<\/a> and short-duration fixed coupon Treasuries. <\/p>\n\n\n\n

Let\u2019s take a look at the rate backdrop for a minute. In my blog post from last week, \u201cFive and Dime<\/a>,\u201d I discussed how other parts of the Treasury market, namely the 2-year and 5-year sectors, had joined the 10-year maturity<\/a> into higher yield<\/a> 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.<\/p>\n\n\n\n

What\u2019s at the root cause, you might ask? It has become increasingly apparent the collective market is becoming more concerned about inflation<\/a>. Indeed, the five-year breakeven spread (a widely watched measure of inflation expectations) rose to just under +300 basis points (bps)<\/a>, its highest reading since 2005. In addition, the outlook for future Federal Reserve (Fed)<\/a> policy has also become less friendly for Treasuries<\/a>. Sure, a tapering<\/a> announcement at next week\u2019s FOMC<\/a> meeting has been built in for awhile now, but as we\u2019ve discussed on many occasions, the market\u2019s attention has quickly turned to the next phase of the policy maker\u2019s exit strategy, rate hikes. As of this writing, Fed Funds Futures<\/a> have now essentially \u201cpriced in\u201d two Fed rate increases for next year. Remember earlier this year when \u201ctaper talk\u201d was just \u201ctalk\u201d and virtually no one was thinking about rate hikes<\/a>? My, have things changed!<\/p>\n\n\n\n

Conclusion<\/strong><\/h2>\n\n\n\n

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\u2019t even moved toward \u201cliftoff\u201d quite yet. The natural question becomes what happens when the Fed actually does begin to raise rates? My suggestion: don\u2019t wait that long.<\/p>\n\n\n\n

—<\/p>\n\n\n\n

Originally Posted on October 27, 2021 – Rates Rising…Who You Gonna Call?<\/a><\/p>\n\n\n\n

Important Risks Related to this Article<\/strong><\/p>\n\n\n\n

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\u2019s portfolio investments. Due to the investment strategy of this Fund, it may make higher capital gain distributions than other ETFs. Please read the Fund\u2019s prospectus for specific details regarding the Fund\u2019s risk profile.<\/p>\n","protected":false},"excerpt":{"rendered":"

It has become increasingly apparent the collective market is becoming more concerned about inflation. <\/p>\n","protected":false},"author":54,"featured_media":0,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[15,6,8,9,26,3],"tags":[570,9909,896],"contributors-categories":[13638],"class_list":{"0":"post-109024","1":"post","2":"type-post","3":"status-publish","4":"format-standard","6":"category-fixed-income","7":"category-north-america","8":"category-region","9":"category-securities","10":"category-text-articles","11":"category-traders-insight","12":"tag-inflation","13":"tag-tapering","14":"tag-treasury","15":"contributors-categories-wisdomtree-u-s"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"\nRates Rising…Who You Gonna Call? | Traders' Insight<\/title>\n<meta name=\"description\" content=\"It has become increasingly apparent the collective market is becoming more concerned about inflation.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.interactivebrokers.com\/campus\/wp-json\/wp\/v2\/posts\/109024\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Rates Rising...Who You Gonna Call? 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