E Fixed Income: Investing In A Rising Rate Environment

The 35-year bond bull market ended in 2016 and since then interest rates have doubled with the 10-year Treasury yield reaching a seven-year high. That has been bad news for Treasury bond owners. The iShares 20+ Year Treasury ETF (TLT) has lost seven percent over the last month. What should fixed-income investors do in a rising rate environment?

Here’s my view:

The ProShares ETF family has an answer. They offer two interest rate hedged ETFs: High Yield-Interest Rate Hedged (HYHG) and Investment Grade-Interest Rate Hedged (IGHG). Both attempt to eliminate interest rate risk by including a built-in hedge that holds short positions in U.S. Treasury futures. HYHG yields 6.1 percent, but that doesn’t reflect the cost of the hedge. That cost is reflected in the fund’s price. IGHG yields 3.7 percent.

An investor can profit from rising rates by holding an inverse bond ETF, such as ProShares UltraShort 20+ Year Treasury (TBT). While this ETF is helpful for traders or those that want a temporary hedge against losses elsewhere, it is not a good buy-and-hold position.

There are fixed-income ETFs that can do well even as interest rates rise. One to consider is PowerShares Senior Loan Portfolio (BKLN). This fund holds floating-rate bank loans. These loans are generally made by a bank to a below investment grade or unrated company, but the rates adjust and are usually tied to LIBOR. BKLN yields 3.8 percent.

The Annaly Capital Management 6.95% Fixed/Float ‘F’ (NLY.F) is a preferred stock that yields just under 7 percent, can’t be called until 2022, and in 2022 its yield will float at 4.993 percent plus three-month LIBOR. With LIBOR currently at 2.41 percent, that’s great if rates continue to rise. Good even if they don’t. 

Prospect Capital’s 6.25% Note (PBB) is an investment grade security that matures in 2024. You can remove the risk of higher interest rates by simply holding this security until 2024. PBB trades at its $25 par value.

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Disclaimer: David Vomund is a fee-only money manager. Information is found at vomundinvestments.com or by calling 775-832-8555. Clients hold the ...

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