WisdomTree Minds on the Markets
Minds on the Markets
Minds on the Markets
Archive: September 11, 2023
Pump It Up
We’re a week away from the next FOMC meeting, and based upon implied probabilities, etc., it looks as if the markets are expecting Powell & Co. to sit this one out. No argument from us there, but could there be another rate hike looming on the horizon for the November gathering? In a somewhat unusual fashion, there doesn’t seem to be all that much conviction, with the outcome of no move or another rate hike currently pegged as a toss-up.
The real question investors need to ask themselves is: does it really matter? Yes, it’s “great sport” trying to predict what the Fed will do at its policy meetings, but the markets are in a much different place now compared to a few months ago, let alone where they were a year ago. In other words, the FOMC, in all likelihood, is either at or close to the end of this rate hike cycle.
Throughout this Fed rate hike episode, we have been continually asked about our thoughts on duration. Sorry, but it does kind of remind us of the movie title “Are We There Yet?” Our answer has been and continues to be that we’d rather be late than early to the duration party. Certainly, the historically inverted Treasury yield curve offers little incentive or urgency to consider making a high conviction move toward lengthening duration. However, the recent run-up in the Treasury 10-Year yield to its highest level in about 16 years does catch your attention.
So, while our overarching investment premise has not changed regarding a fixed income portfolio’s duration exposure, is there a way to approach the rate situation investors find themselves in? Our answer is to look toward a time-tested approach to bond investing: the barbell strategy. For those not familiar with this concept, think of another bond strategy, the “laddered” maturity bond portfolio, but without the middle rungs. The result is you have a core-like duration vehicle on one side of the barbell complemented by an ultra-short/short duration vehicle, such as Treasury floating rate notes, on the other side.
What does the barbell achieve? Perhaps one of the more important attributes is that it removes the need to make an interest rate call. As we’ve witnessed on numerous occasions throughout the last year or so, calls to say now is the time to go “long” duration have certainly not worked out well at all. Our premise is, why put this unnecessary layer of uncertainty into your bond equation if you can mitigate it? In addition, this combination approach is also designed to help reduce the volatility quotient, something that continues to remain elevated in the Treasury arena.
There seems to be little doubt that the bond market has finally embraced the “higher for longer” scenario for rates. Combined with the aforementioned inverted yield curve, the barbell strategy offers investors a means of taking advantage of a bond yield setting that a generation of investors have never seen before with the ever-important factor of controlling your duration risk.
For more information, contact your WisdomTree representative or visit WisdomTree.com/investments.
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