With an improved economy and better employment prospects, a rate hike by the Fed is back on the table for 2015. We have already started to see rates move higher in recent weeks in anticipation of this, as benchmark 10-year debt is now around 2%, a sharp and sudden increase from levels which were in the 1.65% range earlier in the month.
If rates continue in this direction, bond investors will likely see something that they haven't experienced in a while, losses. With rising rates bond prices will fall, hitting the returns for investors who have big holdings in the fixed income world (see Play Rising Rates with These ETFs ).
What's a Fixed Income Investor to Do?
This puts fixed income investors in quite the quandary, as many still desire the stability that comes with bonds, but with the writing on the wall for rates, it is hard to be too optimistic about the space in the near term. However, should we see a burst in market volatility, investors will likely clamor for more bond holdings, putting many investors in a difficult spot.
Fortunately, thanks to some relatively new bond ETFs, fixed income investors might have a solution on their hands. These new products are 'negative duration' bonds and they actually look to rise in price when rates rise and thus are basically built for a rising rate environment (see 3 Sector ETFs to Profit from Rising Rates ).
Currently, there are two such funds both coming to us from WisdomTree. First up we have the Aggregate Bond Negative Duration Fund ( AGND ) which has a -5 year duration, and then the High Yield Bond Fund ( HYND ) which has a -7 year duration for those who focus on the junk bond market.
These types of funds could be interesting stand alone picks, or ones to pair with other bond holdings as well. For example, an AGG investor could use AGND in order to bring down their overall duration, while a similar strategy can be used by HYG or JNK investors who are looking to ratchet down their interest rate risk levels with HYND.
For more on these funds and how they can be used in a portfolio, watch our short video on the topic below!
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