Shorten Your Duration While the Fed Extends Rate Hikes

It appears the Federal Reserve will continue taking its hawkish path to fighting inflation.

Recently released minutes from the Federal Open Market Committee’s July 26–27 policy meeting show that Fed officials saw “little evidence” that inflation pressures were easing and expressed resolve to bring down inflation. While they didn’t provide specific guidance for future increases, officials said they’d be closely watching data before deciding on rate hikes.

“With inflation remaining well above the Committee’s objective, participants judged that moving to a restrictive stance of policy was required to meet the Committee’s legislative mandate to promote maximum employment and price stability,” the minutes said.

The minutes suggested that once the Fed sees its rate hikes as having an impact on inflation, it could start to ease up on its aggressive policy.

“Participants judged that, as the stance of monetary policy tightened further, it likely would become appropriate at some point to slow the pace of policy rate increases while assessing the effects of cumulative policy adjustments on economic activity and inflation,” the minutes added.

With the Fed looking to keep raising rates and inflation not going anywhere anytime soon, fixed income investors nervous about rising rates can mitigate risk by limiting exposure to potential increases. This can be done by shortening duration.

The Avantis Short-Term Fixed Income ETF (AVSF) is an actively managed fund that invests primarily in investment-grade quality debt obligations from a diverse group of U.S. and non-U.S. issuers with shorter maturities.

“Securities may include those issued by corporations or governments and their agencies, instrumentalities, or sponsored corporations including supranational organizations,” according to VettaFi. “The portfolio selection seeks bonds with high expected returns through a process that uses an analytical framework, which includes an assessment of each bonds expected income and capital appreciation.”

The portfolio managers for AVSF organize the fund’s universe into component groups based on industry sector, credit rating, duration, country, and currency. They then calculate the expected return implied by each component group’s yield curve while considering valuation metrics like duration and option-adjusted spreads.

AVSF, which has an expense ratio of 0.15%, aims for a three-year average maturity. The fund may also invest in credit default swaps and total return swaps.

For more news, information, and strategy, visit the Core Strategies Channel.

https://www.etftrends.com/core-strategies-channel/shorten-your-duration-while-the-fed-extends-rate-hikes/

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