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4 Bond ETFs to Play in a Rising Rate Environment

Sanghamitra Saha
j2 Global (JCOM) is seeing favorable earnings estimate revision activity and has a positive Zacks Earnings ESP heading into earnings season.

The global bond market saw widespread sell-off on the news that the Bank of Japan (BoJ) is reportedly looking for ways to tweak its yield curve control policy and stock-buying techniques. The news pushed up the Japanese benchmark 10-year yield to the highest point in nearly six months, sweeping U.S. and European bond yields upward as well.

U.S. 10-year Treasury yields touched a five-week high at 2.96% on Jul 23, up from 2.89% recorded in the previous day. Germany’s 10-year bond yield rose to a one-month high on Jul 23. In any case, the U.S. benchmark Treasury yield has been on an upward trajectory this year and already tested the 3%-mark in the first half, thanks to a hawkish Fed.

The Fed has enacted two rate hikes this year, one in March and the other in June. The Fed is now planning a total of four rate hikes in 2018. This is against the Fed’s previous projections of a total of three rate increases this year. The Fed’s inflation expectations have also picked up. Meanwhile, the European Central Bank (ECB) has announced plans of exiting the QE policy by the end of this year (read: Trade, Fed & Oil Wrote Top ETF Stories of 1H).

Against this backdrop, bond yields are rising, which means that the bull market for bond ETFs is coming to an end. Still, there are some bond ETFs at investors’ disposal which can be exercised now.

iShares Floating Rate Bond ETF FLOT

Unlike fixed coupon bonds, these do not lose value when rates go up, making the notes ideal for protecting investors against capital erosion in a rising rate environment (read: Win From Rising Rates With These 4 ETF Strategies).

Highland/iBoxx Senior Loan ETF SNLN

Another option in this space is to tap bank loan ETFs like SNLN (yields about 4.62%). Senior loans, also known as leveraged loans, are private debt instruments issued by a bank and syndicated by a group of banks or institutional investors. These provide capital to companies that have below-investment grade credit ratings. In order to compensate for this high risk, senior loans usually pay higher yields (read: 5 ETF Ways Bond Bears Must Try in 2018).

WisdomTree Negative Duration High Yield Bond ETF HYND

Negative duration bond ETFs offer exposure to traditional bonds while at the same time short Treasury bonds using derivatives such as interest-rate swaps, interest-rate options and Treasury futures. The short position cuts the fund’s actual long duration, resulting in negative duration. The fund yields 4.78% annually, thus making it an intriguing pick.

PIMCO Enhanced Short Maturity Active Exchange-Traded Fund MINT

Since ultra-short-term bonds are less vulnerable to interest rates, MINT could be used in a rising rate environment. The fund is actively managed and seeks to manage interest rate risk while maximizing current income through diversified exposure to short-term investment grade bonds. It added about 0.02% on Jul 23.

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ISHARS-FL RT BD (FLOT): ETF Research Reports
 
PIMCO-E SMETF (MINT): ETF Research Reports
 
WISDMTR-MLHYBN (HYND): ETF Research Reports
 
HILND/IBX-SR LN (SNLN): ETF Research Reports
 
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