The Federal Reserve opted to hold rates steady in the March FOMC meeting, while also lowering growth expectations for the U.S. economy this year. With the inflationary impacts of current and future tariffs looming over markets and recession risks rising, ultra-short duration bonds may provide an attractive hedge in the current environment of uncertainty.
Rising geopolitical risks, trade wars, rapidly evolving economic policies, and more continue to create volatility in markets. It creates an environment of increasing concern about rising stagflation risks, should growth slow and inflation climb. Should growth slow substantially enough, recession could feasibly follow.
Major stock indexes hit correction territory this month (down 10% from 52-week highs). The March CNBC Fed Survey revealed an increase in recession probability from 23% in January to 36% in February. Those surveyed cited policy volatility and rising consumer spending risks. The inflationary impact of tariffs further complicates the picture for the Fed and interest rates.
“A global trade war, haphazard DOGE cuts to government jobs and funding, aggressive immigrant deportations, and dysfunction in DC threaten to push what was an exceptionally performing economy into recession,” Mark Zandi, chief economist at Moody’s Analytics, told CNBC.
Trim Your Risks Amidst Uncertainty With KCSH
In an environment rife with uncertainty and risk, ultra-short bonds often prove a popular hedge for investors. With their lower rate risk profile, they could prove increasingly popular should equity drawdowns continues.
The +*KraneShares Sustainable Ultra Short Duration Index ETF*+ (KCSH ) seeks to track the Solactive ISS Sustainable Select 0-1 Year USD Corporate IG Index. That index measures the performance of investment-grade corporate bonds with maturities up to one year. Adding the investment-grade component may help appease more risk-averse fixed income investors. Investment-grade bonds generally offer a lower default risk profile than their high yield peers.
As of March 20, KCSH has a 30-day SEC yield of 4.32%. The strategy offers a diversified portfolio compared to many ultra-short bond strategies while retaining the general risk profiles of the category. This includes lower interest rate and credit risk than longer duration bonds.
KCSH makes for a notable complement within an income sleeve because of its diversification potential. Top holdings within the fund include Microsoft, Manufacturers and Traders Trust, and Truist Financial Corp, as of March 20.
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