With the Federal Reserve’s decision on interest rates due out on Wednesday, investors should focus on a few key exchange traded funds tied closely to the bond market and to rates in general.
The Fed's two-day policy meeting kicks off Tuesday, with a decision due out on Wednesday. The market widely expects a quarter-point rate hike, as well as some guidance about the pace of future rate increases.
In anticipation of a rate hike and future hikes, bond yields have surged. This move has sent fixed-income ETFs lower, with many reaching 52-week trading lows.
Below are four ETFs and their year-to-date price action that have seen crippling moves as yields have risen.
The iShares Core U.S. Aggregate Bond ETF (NYSEARCA:AGG) -4.8%, Vanguard Total Bond Market ETF (NASDAQ:BND) -5%, PIMCO Active Bond Exchange-Traded Fund (NYSEARCA:BOND) -5.9%, and the Schwab U.S. Aggregate Bond ETF (NYSEARCA:SCHZ) -4.9%. See Seeking Alpha’s quantitative and fundamental analysis on each ETF for greater insight.
While rising yields have crushed treasury-related ETFs, there are ways investors can exploit a rising-rate environment. Market participants that are betting on higher yields can invest in inverse ETFs that are designed to bet against bond prices.
Four examples and YTD prices are the ProShares UltraShort 20+ Year Treasury ETF (NYSEARCA:TBT) +14.6%, ProShares Short 20+ Year Treasury ETF (NYSEARCA:TBF) +7.1%, ProShares UltraPro Short 20+ Year Treasury (NYSEARCA:TTT) +21.7%, and the Direxion Daily 20+ Year Treasury Bear 3x Shares ETF (NYSEARCA:TMV) +21.7%. See Seeking Alpha’s quantitative and fundamental analysis on each ETF for greater insight.
The U.S. 10-Year Treasury bond is back above 2%, now sitting at 2.1% as it has closed positive in its last six sessions, popping up 40 basis points since the Mar. 7 open. Over the same time period, the U.S. 2-Year Treasury yield has also moved up 37 basis points to 1.8%. See below chart outlining the recent topside move.
Ahead of the FOMC decision Standard Chartered strategist Steve Englander stated: "There is a strong consensus that the FOMC will take a hawkish stance, barring a surprise intensification or broadening of the Russia-Ukraine war."