The Federal Reserve’s torrid pace of interest rate increases in 2022 had the predictable impact of sending bond yields soaring and prices tumbling. One of the most clear results of those rate hikes was yields on cash instruments also rose.
The thing is, when yields on cash rise, it’s a positive for investors because there’s no underlying asset on which prices are falling. That is to say, market participants had good reason to flock to money market funds amid the Fed rate hikes. And they did to the tune of trillions of dollars.
Amid expectations that the central bank could pare borrowing costs multiple times this year, investors are pulling some capital out of money markets. That could be a positive for the bond market and exchange traded funds such as the BondBloxx Bloomberg Ten Year Target Duration US Treasury ETF (XTEN ) and the BondBloxx Bloomberg Twenty Year Target Duration US Treasury ETF (XTWY ).
Why XTEN, XTWY Matter Today
With yields of 5% and, in some instances, higher, money market funds and high-yield savings accounts lured an estimated $7 trillion in cash over the past couple of years. Those inflows make sense because cash is a risk-free asset. Combine that status with big yields and it’s a perfect storm of pain for bond funds.
The other side of that coin is that as rate-cut expectations increase, cash yields decline. That could be a positive catalyst for ETFs like XTEN and XTWY, which still sport impressive yields and do so with exposure to Treasuries – a low-risk asset class in its own right. Take the case of XTEN. That ETF sports a 30-day SEC yield of 4.08%. That’s potentially attractive at a time when the go-go days of high yields on cash appear to be gone.
Plus, as an intermediate-term bond fund, XTEN can provide some support in the event equities decline, which isn’t out of the realm of possibility.
“Lured by 5% yields, investors have flooded into money-market funds and other cash proxies, plowing more than $7 trillion into the holdings. But the outlook for cash is dimming. The Federal Reserve is widely expected to cut its benchmark federal-funds rate this year; the timing and magnitude are a coin toss, but even small rate cuts would erode yields on cash,” reported Lauren Foster for Barron’s.
Declining cash yields could also be a boon for XTWY. With a 30-day SEC yield of 4.21%, it’s one of the highest-yielding funds in the BondBloxx suite.
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