After a few weeks of speculation that the Federal Reserve won’t lower rates in December, expectations have shifted. Odds that the central bank will trim borrowing costs this month have surged to nearly 80% from 40%.
It could be a last-ditch effort by Fed Chairman Jerome Powell to save his job or another motivation. Whatever the reason, if the Fed obliges bond markets with some holiday cheer, an array of fixed income ETFs could benefit. The actively managed Neuberger Berman Total Return Bond ETF (NBTR ) is part of that conversation.
“The change comes after weeks of increasingly hawkish sentiment from those on the Fed’s policy-setting committee advocating for a pause in the easing cycle, citing the threat of inflation still hovering above the central bank’s target and strong measures of growth in some areas of the economy,” noted Morningstar analyst Sarah Hansen. “Meanwhile, policy doves are more concerned about a slowdown in the labor market.”
NBTR Could Be Rate Cut Winner
NBTR celebrates its second birthday as an ETF in December. It can be viewed as an alternative to traditional passively managed aggregate bond funds. Sure, those ETFs could benefit from easier Fed policy, but NBTR could be the better rate cut bet.
This ETF’s roster of 445 bonds is diminutive relative to many passive aggregate bond ETFs. However, that roster size is an expression of the management team’s conviction. Some of the conviction pertains to correlations to lower rates. That flexibility is pertinent. Currently some Fed members, including New York Fed President John Williams, view the central bank’s policy as too restrictive.
“I view monetary policy as being modestly restrictive, although somewhat less so than before our recent actions,” he said in recently issued prepared remarks. “Therefore, I still see room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral.”
Importantly, the alteration in rate cut wagers emerges after the opposite sentiment appeared to be prevailing. That indicates that ETFs like NBTR could be in for their own “Santa Claus rallies.”
“The change comes after weeks of increasingly hawkish sentiment from those on the Fed’s policy-setting committee advocating for a pause in the easing cycle, citing the threat of inflation still hovering above the central bank’s target and strong measures of growth in some areas of the economy. Meanwhile, policy doves are more concerned about a slowdown in the labor market,” added Hansen.
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