Investors appear to be finally accepting the idea that the Federal Reserve will raise interest rates into restrictive territory and remain at that high rate for a while. Results from a recent survey by CNBC show that the average respondent believes the U.S. central bank will raise interest rates by 75 basis points at its meeting on Wednesday, which would bring the federal funds rate to 3.1%.
The Fed is expected to keep raising rates until the rate peaks in March 2023 at 4.26%. The new peak rate forecast is an increase of 43 basis points from CNBC’s July survey.
The Fed has raised interest rates four times this year for a total of 2.25 percentage points. Those hikes included two 0.75 percentage point increases in June and July.
With the Fed expected to keep raising rates until March 2023, there’s a growing concern among respondents that the U.S. central bank will overdo its tightening and trigger a recession. In response to the survey, Bleakley Financial Group CIO Peter Boockvar wrote, “I’m fearing they are on the cusp of going overboard with the aggressiveness of their tightening, both in terms of the size of the hikes along with (quantitative tightening) and the speed at which they are doing so.”
Fixed income investors nervous about rising rates and a possible recession may want to consider actively managed bond ETFs like the Avantis Short-Term Fixed Income ETF (AVSF), the American Century Diversified Corporate Bond ETF (KORP), and the American Century Diversified Municipal Bond ETF (TAXF).
AVSF invests primarily in investment-grade quality debt obligations from a diverse group of U.S. and non-U.S. issuers with shorter maturities. The fund’s portfolio managers seek bonds with high expected returns through a process that uses an analytical framework, which includes an assessment of each bond’s expected income and capital appreciation.
AVSF, which carries an expense ratio of 0.15%, aims for a three-year average maturity.
KORP, meanwhile, offers investment-grade quality debt holdings. The fund seeks current income by emphasizing investment-grade debt while dynamically allocating a portion of the portfolio to high yield.
Per its product website, KORP creates a systematically managed portfolio that integrates fundamental and quantitative expertise that: adjusts investment-grade and high yield components to balance interest rate and credit risk; screens individual credits to seek those with sound fundamentals, reduced default risk, attractive valuations, and liquidity; and adjusts industry and duration exposures as risks and opportunities emerge.
Finally, TAXF seeks to provide consistent tax-free income by employing an active, research-driven process that draws from across the municipal bond universe and adjusts exposure depending on prevailing market conditions. As with local government bonds in the U.S., credit risk is minimized with close to 80% of the fund ranging in debt rated at AAA to A (as of May 31).
Both KORP and TAXF have an expense ratio of 0.29%.
For more news, information, and strategy, visit the Core Strategies Channel.