Two bond ETF strategies that may help investors profit from rate hikes

Two bond ETF strategies that may help investors profit from rate hikes

Interest rate fluctuations are clearly pushing investors towards the shorter end of the yield curve, according to Joanna Gallegos, co-founder of fixed income ETF issuer BondBloxx.

Gallegos, a former head of global ETF strategy at JPMorgan, thinks it’s a sensible approach.

“It’s an intuitive trade. It’s not the year 2022. That wasn’t even five years ago. The returns are very fundamentally different,” she told Bob Pisani on CNBC’s ETF Edge earlier this week.

Gallegos predicted that the Federal Reserve will hike rates by another 100 basis points.

“That’s what the market is estimating…until about July. As interest rates rise, people are a little unsure about what’s going to happen to bond prices really far out,” she said. “If you go to the longer side of duration, you take on more price risk.”

However, Kim Arthur, CEO of main management, said he finds long-dated bonds attractive as part of a barbell strategy. Long-term bonds are a valuable hedge against a recession.

“It’s part of your allocation, but not the whole part because over the long term, as we know, equities will significantly outperform fixed income,” he said. “They’re going to give you this inflation hedge on top.”

When asked if the 60/40 stock-to-bond ratio was dead, Gallegos replied that it was true a year ago, but not anymore.

“That was … before the Fed hiked rates 425 basis points last year, so everything has shifted year-to-year in terms of yields,” she said.

From Friday close is the 10-year US government bonds around 3.7% – an increase of 84% over the previous year. Meanwhile the Yield on 6-month US Treasury bonds was around 5.14%, up 589% in one year.