Investor sentiment regarding intermediate-term Treasuries may change.
David Botset of Schwab Asset Management is seeing an increase in flows into bonds with maturities typically of three to five years, and sometimes as long as 10 years.
“People are starting to realize that we’re at the peak of rising interest rates,” the company’s head of innovation and management said on CNBC’s “ETF Edge” this week. “So they’re looking to reposition the fixed income portion of their portfolio to take advantage of where interest rates are likely to go next.”
That’s a change from last year, when short-term bonds and money market funds saw strong inflows. Unlike 2023, more investors are trying to figure out what to do if the Federal Reserve cuts rates, which could happen as early as this year.
“When interest rates fall at a time like this, not only do you get income from it [intermediate-term] bonds, you get price increases because bond yields and bond prices are inverse,” Botset said.
In the middle of the yield curve, he added, this is “less likely for [rates] come down and you can have that harvest for a longer period of time.”
But Nate Geraci, president of the ETF Store, cautions against betting too much on the Fed’s next move.
“Taking on some duration risk makes sense, but I wouldn’t go too far,” he said. “Dynamics of risk and return [of] going too far on the long end doesn’t make much sense to me.”
“Not sure”
Geraci believes that the Fed’s fight against inflation is not over yet, and this could change the timing of rate cuts.
“If you start to get out of the curve, you’re betting that the Fed will actually get it right this time. And they may well… but that’s not a fact,” Geraci said. “Inflation data may still be hot. The last result we saw was higher than the market expected. So the Fed could stay higher for a long time, and I just think you have to be aware of that as an investor.”
Denial of responsibility