The capital markets have been bracing themselves for rate hikes, which are expected to come in the trading week ahead. Even as Russia’s invasion of Ukraine has taken center stage, inflation has been percolating in the background for some time.
There should be no rabbit punches pulled as the U.S. Federal Reserve has been hinting that a quarter-point rate hike was coming ahead. What could be of more importance is how it reveals its future plans for combating inflation and its gauge on the current economic environment.
“Earnings are over. Monetary policy is obviously going to be important here. I don’t see the Fed surprising anyone next week,” said Steve Massocca, managing director at Wedbush Securities. “It’s going to be a quarter-point, and then step into the background and watch what’s happening in Europe.”
An Ultra-Short and Active Option
In the meantime, bond investors can protect themselves from further Fed hawkishness with ultra-short bond funds. These funds help limit exposure to bond yields via rate risk mitigation.
Furthermore, getting an active management strategy can certainly help with navigating a tricky bond market environment. One ETF option to consider is the T. Rowe Price Ultra Short-Term Bond ETF (TBUX).
TBUX seeks high levels of income that are consistent with low volatility of principal value by investing primarily in investment-grade, short-term securities. Based on the fund’s fact sheet, the portfolio’s dollar-weighted effective maturity is generally expected to be 1.5 years or less.
In totality, the fund invests in investment-grade corporate and government bonds; this includes mortgage-backed securities, municipal securities, money market securities, bank obligations, and securities from foreign issuers. For the cost-conscious, especially when it comes to making mention of an active fund, the net expense ratio is only 0.17%.
As of January 31, the 30-day SEC standardized yield is at 1.51%. That’s about double what you can get for the current money market rates as long as you’re willing to take on more credit risk.
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