The Federal Reserve’s aggressive plan to fight inflation may be exacerbating volatility within bond markets. Intraday yield swings of more than 10 basis points are becoming common across most major markets. On Monday, 10-year Treasury yields dropped almost eight basis points by the end of the day after rising four basis points in the morning.
Market weaknesses that had previously been hidden by easy monetary policies are now being revealed, with dislocations in the $23 trillion U.S. Treasuries market fueling concern from investors and regulators about possible chaos reverberating across the entire economy.
“With U.S. Treasuries serving as the risk-free benchmark for more than $50 trillion of fixed-income assets, extreme volatility in their yields could make it tougher for private-sector companies to raise capital easily and at the lowest possible cost,” according to Bloomberg.
The lack of Fed purchase of Treasuries has hindered trading, causing some dealers to say that dislocations in money markets may pressure the U.S. central bank to scale back its plans to reduce its portfolio that had ballooned to nearly $9 trillion thanks to quantitative easing.
Lawrence Gillum, a fixed income strategist at LPL Financial, told Bloomberg that we’re “now seeing outsized intraday yield moves in the U.S.,” before adding: “If we start to see more cracks in markets, the Fed will be in a really tough situation – because they will be trying to fight inflation on one hand and on the other trying to support the smooth functioning of the Treasury market.”
With volatility plaguing the bond markets, investors may want to take a more proactive approach to investing in fixed income. That’s where an active fixed income manager can help. While passive strategies often lack the flexibility to adapt to changing market environments, active bond ETFs can offer the potential to outperform fixed income benchmarks and indexes.
“Navigating the bond market is even more challenging for advisors this year as bonds fall in value,” said Todd Rosenbluth, head of research at VettaFi. “However, the ability to tap into the expertise of experienced managers along with the liquidity benefits of an ETF has been compelling.”
As part of its lineup of active exchange traded funds, T. Rowe Price offers a suite of actively managed fixed income ETFs, including the T. Rowe Price QM U.S. Bond ETF (TAGG ), the T. Rowe Price Total Return ETF (TOTR ), and the T. Rowe Price Ultra Short-Term Bond ETF (TBUX ).
T. Rowe Price has been in the investing business for over 80 years through conducting field research firsthand with companies, utilizing risk management, and employing a bevy of experienced portfolio managers carrying an average of 22 years of experience.
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