On the back of a strong March employment report, speculation is intensifying that the Federal Reserve may have to be more conservative than originally hoped when it comes to deploying interest rate cuts this year. The other side of that coin is that with 2024 being an election year, the Fed may be under pressure to lower rates a couple of times to signal that the economy is strong. Should that happen, a variety of fixed income assets stand to benefit, including intermediate-term government bonds – an asset class accessible via an array of exchange traded funds including the newly minted WisdomTree 7-10 Year Laddered Treasury Fund (USIN ).
USIN, which tracks the Bloomberg US Treasury 7-10 Year Laddered Index, debuted last month. As its name implies, the rookie ETF uses a laddered approach, meaning the bonds it holds have various maturities. In this case, seven years to 10 years.
USIN Methodology Could Prove Advantageous
Bond laddering, particularly within the confines of the ETF wrapper, can be useful to advisors and investors because the approach can defray some of the risk associated with rate hikes or Federal Reserve disappointment regarding interest rate reductions.
Likewise, should the central bank lower rates, USIN’s holdings with durations close to and at 10 years would likely benefit. Those perks are worth considering in the current rate environment.
“The bond market outlook has improved as expected rate cuts align more closely with the Fed,” according to BlackRock. “But these expectations reflect the view that policy is restrictive, which remains challenged by strong economic data. Easing financial conditions from asset price changes may lead to continued uncertainty around policy restrictiveness, undermining the urgency and need for policy normalization.”
While only the Fed knows when and to what it extent it will lower rates, some experts believe the central bank could pare borrowing costs by up to 75 basis points this year simply in an effort to restore equilibrium to the yield curve. It’s possible such moves would bring positive implications for assets such as USIN.
“This restores a better risk/reward balance to adding duration into portfolios today compared to the start of the year. Maintenance cuts are intended to reduce nominal policy rates as inflation falls. In ‘real’ (inflation-adjusted) terms, this helps to maintain policy rates as opposed to policy becoming more restrictive with real rates rising as inflation falls in the absence of a reduction in nominal rates,” added BlackRock.
USIN has an effective duration of 7.27% years and an annual expense ratio of 0.15%.
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