EC Positioning Bonds Along The Yield Curve For A Fed Funds Rate Increase

Too much time and talk is being devoted to when the Fed will make its first Fed Funds rate increase in many years, while too little time and talk is being devoted to how to position for it.

Let’s talk about Treasury bonds as they relate to a future Fed Rate increase, whether it happens next week, in a few months, or later.

Before we do that, let’s look at corporate bonds, which we don’t think are particularly attractive in the short-term.

Corporate profits overall are recently flat to slightly down; with concerns about:

  • what impact a Fed Funds rate increase may have;
  • possible further strengthening of the Dollar to the detriment of corporate earnings
  • fears (we think not well founded so far) of a global recession induced by China or something else.

Those and similar thoughts have resulted in the yield spread between corporate bonds and similar maturity Treasuries to widen. That puts downward price pressure on corporate bonds relative to Treasury prices.

Figure 1 shows the “credit spreads” for corporate bonds  of various quality levels — the spreads are rising — reducing the appeal of corporate bonds except for the highest quality.



Bill Gross in his September letter likes cash or 1-2 year corporate bonds best at this time:

“High quality global bond markets offer little reward relative to durational risk. …Cash or better yet “near cash” such as 1-2 year corporate bonds are my best idea of appropriate risks/reward investments. The reward is not much, but as Will Rogers once said during the Great Depression – “I’m not so much concerned about the return on my money as the return of my money.”

For those looking to follow Bill Gross’s opinion for cash or 1-2 year credit bonds, cash is an easy solution; and two investment grade corporate bond ETFs with 2-year average maturities from major sponsors might fit the Gross’s corporate bond idea: CSJ (iShares) and SCPB (SPDRs).

Figure 2  is a price performance chart of CSJ (trailing yield 1.04% ) versus the 2-year Treasury yield (current yield 0.71%):



Rates are more abstract that bond prices. Figure 3 shows the year-to-date distribution adjusted prices for readily investable corporate bond funds:

  • Vanguard Short-Term corporates (VCSH),
  • Vanguard Intermediate-Term corporates (VCIT),
  • Vanguard Long-Term corporates (VCLT),
  • Ishares High Yield corporates (HYG).
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Disclosure: None.

"QVM Invest”, “QVM Research” are service marks of QVM Group LLC. QVM Group LLC is a registered investment advisor.

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Jibu 5 years ago Member's comment


T. Cohen 5 years ago Member's comment


Gary Anderson 5 years ago Contributor's comment

I am no investment adviser, but I do know European investors are buying bonds for the price appreciation even as interest rates turn negative.