Six months remain in 2024. That indicates it’s possible the Federal Reserve could lower interest rates multiple times. But the prevailing consensus among many bond market observers is that “higher for longer” is the order of the day.
The 1.71% year-to-date loss sported by the Bloomberg U.S. Aggregate Bond Index reflects that sentiment and could be a deterrent to investors looking to embrace supposedly low-risk U.S. government debt. Amid what could be a new rate regime, fixed income investors can stick with Treasurys while mitigating some rate risk by embracing laddered strategies. That’s an endeavor made more efficient thanks to ETFs like the The WisdomTree 1-3 Year Laddered Treasury Fund (USSH ).
USSH, which debuted in March, follows the Bloomberg US Treasury 1-3 Year Laddered Index. As the gauge’s name implies, the ETF holds Treasurys with maturities of one to three years. That means duration risk is relatively benign, as highlighted by an effective duration of just 1.81 years.
Laddered Perks
USSH ladders with short-term Treasurys. In normal rate environments, investors would exchange lower rate risks for lower yields. However, in a higher-for-longer climate, the ETF could be an appealing option. That’s because not only does it offer reduced sensitivity to changes in Treasury yields, it does so with the benefit of a 30-day SEC yield of 4.69%. That’s high, considering the ETF’s duration and low credit risk. The point is USSH could be an appropriate consideration for a variety of bond investors.
“Even if the Fed shifts to rate cuts in 2024, overall yield levels will likely remain elevated compared to the years leading up to and including the Covid pandemic,” noted WisdomTree. “After enduring historically low rates for more than a decade, a new rate regime has taken hold, returning fixed income to its more traditional role in investors’ portfolios.”
Of course, it’s possible that inflation will cool materially. That would pave the way for the Fed to lower rates more than expected. In that case, longer duration bonds and related ETFs would be rewarded. That’s still a tough to call make indicating investors should not get over-zealous in embracing long duration fare. But the WisdomTree 7-10 Year Laddered Treasury Fund (USIN ) could be an ETF to consider.
USIN debuted alongside USSH and has its own set of advantages. In addition to a diverse portfolio comprising bonds four years of maturities, the ETF’s exposure to intermediate term bonds is relevant. That’s because those bonds often aren’t highly tied to rate shifts. But they usually aren’t highly correlated to equities, either.
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