Fears of economic slowdown due to inflation and rising rates put downward pressure on fixed income markets and overall yields. However, rising rates could also lead to an eventual deluge of new asset flows as yields stabilize and become increasingly more attractive to investors.
As if hot inflation and the U.S. Federal Reserve’s tightening monetary policy aren’t enough, investors also need to keep an eye on the ongoing conflict with Russia and Ukraine. One more thing to add to the wall of worry is that more COVID-19 outbreaks are occurring in China.
All these factors are tamping down investor sentiment as the threat of a recession is looming. Inverting yield curves, a sign of a portending recession in the bond market, have also provided warning signals to investors.
“Growth scares will cause a temporary decline in yields, but unless there’s a real threat of a global slowdown (which there isn’t yet), then the direction of global yields remains higher, and we again think it’s just a matter of time until the 10-year yield hits 3%,” Tom Essaye, founder of Sevens Report, said in a research note.
Get Active, Aggregate Bond Exposure
Instead of following a passive index, investors can get more dynamic exposure to an ever-changing bond market with active management. That is available in a single ETF — the T. Rowe Price QM U.S. Bond ETF (TAGG).
TAGG seeks to outperform the Bloomberg U.S. Aggregate Bond Index at a low expense ratio of just 0.08%. This actively managed portfolio is broadly diversified, containing a mix of investment-grade, fixed-income instruments with varying maturity dates.
TAGG is intentionally designed to provide U.S. Agg-like exposure, but with the added potential benefit of improved performance and market adaptability through fundamental security selection. The obvious skew is towards U.S. debt, with Treasury notes comprising the majority of holdings. As of March 31, the top holding (11% of the fund’s allocation) is Treasury notes that mature in 2026.
The fund comes with a 30-day SEC yield of 4.79% (as of March 31, 2022). The fund will also typically include U.S. government and agency obligations, corporate bonds, mortgage- and asset-backed securities, and U.S. dollar-denominated securities from foreign issuers. This portfolio latitude allows the manager to seek out, and potentially capitalize on, the structural inefficiencies of fixed income indexing.
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