Data is indicating inflation and the U.S. economy are cooling. So speculation is intensifying that September will bring with it a much awaited interest rate cut by the Federal Reserve. It’s possible that will be the first of two reductions before the end of the year. Should the central bank oblige, long duration bonds and the related exchange traded funds could be attractive again. Astute market participants won’t wait for the Fed to officially pare rates. They’re likely to add some more duration in advance of that event.
Advisors and investors can get in on the duration addition act with the WisdomTree Yield Enhanced U.S. Aggregate Bond Fund (AGGY ).
The $920.8 million AGGY follows the Bloomberg U.S. Aggregate Enhanced Yield Index and sports an effective duration of 6.20 years, as of July 22. That’s intermediate-term territory and that could be the ideal place for fixed income investors to be. Investors may then avoid the risks associated with long duration bonds and garner higher yields than short-term instruments offer.
Macro Factors Support Case for AGGY
AGGY has duel tailwinds. These are an attractive 4.82% 30-day SEC yield – one that comes with the benefit of high credit quality – and supportive economic data.
“While it seems reasonable to continue to sit in cash, incoming data indicate growth and inflation should continue to normalize, and as the Fed reduces interest rates—albeit gradually—this should exert modest downward pressure on interest rates. It should also be emphasized that yields across high-quality fixed income remain attractive relative to recent history,” noted Jordan Jackson, global market strategist at J.P. Morgan Asset Management.
In The Case of Multiple Rate Cuts
AGGY could also be a relevant choice for advisors and investors even if the Fed lowers rates multiple times before the end of 2024. Other factors could be headwinds to the bond market, including the domestic election volatility and soaring deficits.
“While these conflicting forces lead us to think long term interest rates will trade range bound in the near term, this doesn’t mean investors shouldn’t lock in attractive yields today. Of course, should rates decline even modestly, the longer duration the better,” added Jackson. “But even if rates remain broadly unchanged, as shown, even a small step out of cash into 2–3-year bonds should generate decent total returns over the next 12 months.”
With about two-thirds of its holdings rated AAA, AA or A, AGGY can provide some buffer against credit concerns. When interest rates decline, the ETF’s yield is likely to be more enticing than what investors earn with money markets. Those are two more factors in AGGY’s favor.
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