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Fed On Pause: Buy IHY

The Hermit Trader profile picture
The Hermit Trader


  • The Fed has announced its intention to put on pause its rate hike programme for this year, which bodes well for the fixed income space and the long-duration trade.
  • While the global economy may be slowing down, we are not lurching towards a recession or crisis. As such, look into the high-yield space for yield.
  • This high-yield ETF provides an attractive yield of above 5% per annum, and its diversified portfolio across geography and sector will help mitigate any concentration risk.

The Federal Reserve looks to be on course to slow down on their aggressive rate hike trajectory, as confirmed by Jerome Powell and Co in their first central meeting of the year this week. The Fed basically told the markets that it would be "patient" with its rate hike programme, presumably till macro risks such as the US-China trade war and Brexit abate. Simply put, markets should definitely not expect 4 rate hikes this year, à la 2018.

While we may not be on the brink of a recession, it appears the Fed is taking no chances and their stance is to swiftly arrest any slowdown the economy might be facing by keeping monetary policy easy.

Aside from the Fed, other central banks around the world do not appear to be on the cusp of a rate hike programme anytime soon. As such, lower-for-longer interest rates globally will likely support bond prices and should provide a more conducive environment for investors to increase exposure to longer-duration bonds.

The VanEck Vectors International High Yield Bond ETF (NYSEARCA:IHY) will likely be a beneficiary of this macro backdrop. As of 1 February 2019, the ETF holds a portfolio of 633 bonds that is diversified across geography and company sectors, with each holding comprising less than 1% of the overall holdings. As such, the potential impact of any issuer default on the overall portfolio performance is mitigated significantly. While the global economy may appear to be slowing down, we are not lurching towards a recession, and as such, the high-yield sector still looks attractive.

The ETF provides an attractive dividend yield of 5.83%, with its portfolio's yield to maturity at 5.32%. The expense ratio is inexpensive at 0.40%, and the portfolio's effective duration is at 3.83 years. As mentioned, with the Fed slowing down on its rate hike trajectory, I

This article was written by

The Hermit Trader profile picture
Momentum / Breakout trader. Charts and price action are universal, transcending languages and cultures. Shares charting views on Substack (website link).

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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