The latest Federal Reserve minutes revealed that more rate hikes could be on the way to tamp down inflation, stressing the need for more interest rate hedging strategies.
“In September, we’re looking for another 50, and then a 25 in each of the last two meetings [this year],” Goldman Sachs chief economist Jan Hatzius said on CNBC’s Squawk on the Street. “I don’t think there’s anything in this report that would dissuade us or the Fed from that.”
Meanwhile, in the bond markets, inverting yield curves are flashing signals of a recession. Short-term bond rates are reflecting the expectation of rising rates while long-term bonds are forecasting a recession.
“The front end of the curve is telling us the Fed has the green light to relentlessly fight inflation, while the long end is saying a recession is brewing. A lot of the economic indicators are showing clearer signs of weakening, so expectations should still remain high that the labor market will probably be slowing down in the fall,” Oanda senior market analyst Edward Moya said in a note to clients.
Rate Hedging in 1 ETF
While there are a plethora of options available to hedge against inflation (Treasury-inflation protected securities, commodities, etc.), there’s a more simple solution to consider: the Interest Rate Hedge ETF (IRHG ). IRHG seeks to provide a hedge against sharp increases in long-term U.S. interest rates and is expected to benefit during periods of market stress when interest rate volatility is elevated. It is an actively-managed ETF designed to benefit when long-term interest rates increase.
Per its fund description, IRHG seeks to achieve its investment objective primarily by investing in long interest rate swap options (“swaptions”) and long positions in short-term U.S. Treasury securities. The latter is used primarily for cash management purposes.
For diversification, IRHG may invest in U.S. Treasury bills directly or through other ETFs. Summarily, IRHG provides investors:
- Institutional exposure: IRHG seeks to achieve its investment objective of providing a hedge against a sharp increase in long-term U.S. interest rates by using over-the-counter (OTC) instruments that are typically only accessible to institutional investors.
- Tactical hedge: By holding options designed to benefit from rising long-term interest rates, IRHG provides access to an efficient fixed income hedging strategy designed to offset interest rate risk in a portfolio.
- Active management: IRHG is an active strategy from the standpoint of interest rate risk management.
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