Following the recent spike in 30-year Treasury yields, global fixed income investors may be leery of adding duration in bond portfolios. But there are avenues for allaying those concerns while maintaining exposure to the relative steadiness of U.S. government debt. Those options include floating rate notes (FRNs), or “floaters.” That’s a less rate-sensitive corner of the bond market accessible via ETFs, including the WisdomTree Floating Rate Treasury Fund (USFR ).
The last three years confirm the advantages of FRNs during tumultuous interest rate environments. Over that span, USFR gained 14.6%, beating the Bloomberg US Aggregate Bond Index by a margin of more than 3-to-1. Add to that, the WisdomTree ETF was significantly less volatile than the “Agg” over that period.
Those favorable volatility trends are on display again this year. And in recent weeks as Treasury market jitters increased, USFR gained while many longer duration rivals notched modestly negative showings. Such trends could reverse. But some signs point to USFR potentially having tailwinds over the remainder of this year.
USFR Could Be Right for These Times
As Kevin Flanagan, head of fixed income strategy at WisdomTree points out, 30-year Treasuries aren’t the only yield surge offenders this year. In fact, comparable British, German, and Japanese bonds have experienced even larger yield increases than have 30-year Treasuries.
“Indeed, in three of the other largest developed sovereign debt markets, the respective 30-Years have also witnessed visible yield increases year-to-date,” noted Flanagan. “The UK, Germany and Japan 30-Year bond yields have risen anywhere from +38 bps to +75 bps. In contrast, the UST 30-Year rate has risen by a more modest +26 bps.”
One way of looking at that volatility is that other markets aren’t providing shelter from Treasury storms. Conversely, investors may not need to look overseas when USFR is available to ameliorate duration concerns.
There are other reasons USFR could be a credible addition to bond portfolios, including elevated government spending in developed markets. President Trump’s “big, beautiful bill” features essentially no spending reductions of note, and Germany, the eurozone’s largest economy, recently authorized significant increases to government expenditures. Over the long term, such moves are likely inflationary and could diminish the appeal of longer-dated government bonds in those markets. All that spending could boost the allure of ETFs like USFR.
Fundamentals May Return to Prominence
“Is the U.S. fiscal path sustainable in the long run? I’m definitely in the ‘no’ camp,” added Flanagan. “However, in the nearer term, if the Treasury debt managers manage to keep note and bond auction sizes relatively constant over the next year, the fundamentals will, as is usually the case, return to prominence.”
This article was prepared as part of WisdomTree’s general paid sponsorship of VettaFi | ETF Trends. This specific content within and any opinions expressed therein belong solely to VettaFi and do not reflect the opinion or analysis of WisdomTree, its employees, or its affiliates. Content published on VettaFi | ETF Trends is provided for educational purposes only and should not be considered investment or tax advice. For investment or tax advice, please consult a financial professional.
WisdomTree is an independent company, unaffiliated with VettaFi | ETF Trends. WisdomTree has not been involved with the preparation of the content supplied by VettaFi | ETF Trends. It does not guarantee, or assume any responsibility for its content.
For more news, information, and analysis, visit the Modern Alpha Channel.
