U.S. fixed-income markets can be confusing, considering the
steady pace of rising interest rates and an economy that is
slowly chugging along. Yet, several fixed-income areas offer
choices for investors to ride out some of the rate increases.
G. David MacEwen, chief investment officer and senior
portfolio manager for American Century Investments, sees "a
continuation of what we've seen in this kind of slow, steady-type
growth, which is not overwhelming growth, but it's strong enough
growth that it allows the Federal Reserve to start working on
tapering their quantitative easing."
He expects interest rates to continue to creep up by the end
of next year, with 10-year Treasury yields reaching above 3%,
maybe near 4%.
"Most of the money that's invested in the bond market is
invested in intermediate-type duration strategies ... and they
have a really high capacity for interest rates to move higher,"
"Investors don't really have too much to worry about from
that. Actually, we've shown that as investors we're better off as
yields go up. ... So what we've termed the 'renormalization' of
yields is over time a good thing. It's just investors have to get
used to it and suffer some potentially shorter-term losses."
If you don't want to accept short-term losses in your bond
portfolio, several alternatives may be a good way to go.
Shifting into shorter-term fixed-income instruments is one way
of riding out the wave of rising rates. But analysts warn to stay
away from high-yield and bank-loan ETFs, which carry a lot of
risk. It's better to stick with higher-quality products, such as
investment-grade floating-rate note ETFs.
One such ETF isMarket Vectors Investment Grade Floating Rate
), which consists of U.S.-dollar denominated investment-grade
floating-rate corporate notes. It has an SEC yield of 0.61%.
Investors can earn an extra yield of about 0.25% to 0.5% over
Libor and the notes reset every three months, giving it a
As short-term rates rise over time, so will Libor and FLTR.
Market Vectors fixed-income portfolio manager Fran Rodilosso
calls FLTR "maintenance free. You're not going to experience
significant capital gains if rates go higher. But if the credits
themselves perform OK, you're not going to experience significant
capital losses either, because from an interest-rate perspective
these notes are meant to hold their value."
However, FLTR has an average daily volume of only about 31,000
shares. A more liquid fund in this universe isiShares Floating
Rate Bond (
). But its SEC yield of 0.35% is lower than FLTR's.
Another option is investment-grade corporate bond ETFs.
"You really don't want companies to have any issues with their
credit as far as credit downgrades," said Tim Strauts, senior
fund analyst at Morningstar. "The economy is not growing at a
fantastic rate, but it's slowly chugging along. So, we're
expecting credit spreads to stay with their act and maybe tighten
a little bit over the next few months. So corporate bonds will do
He suggests taking a look atiShares iBoxx $ Investment Grade
Corporate Bond ETF (
). With $18 billion in assets, it is the largest investment-grade
corporate bond fund. It trades an average of 2 million shares a
day and has an SEC yield of 3.52%. But its duration is 7.5 years,
making it a more long-term addition to one's portfolio.