Two bond ETF strategies that may help investors profit from rate hikes

Beyond bond basics – advanced strategies

Interest rate jitters are meaningfully pushing investors to the shorter end of the yield curve, according to Joanna Gallegos, co-founder of fixed-income ETF issuer BondBloxx.

Gallegos, former head of global ETF strategy for JPMorgan, believes it’s a sound approach.

“It’s an intuitive trade. This is not 2022. This is not even five years ago. Yields are very fundamentally different,” she told Bob Pisani on CNBC’s “ETF Edge” earlier this week.

Gallegos predicted the Federal Reserve will lift rates by another 100 basis points.

“That’s what the market’s estimating … until around July. So, as interest rates are going up, people are a little uncertain about what’s going to happen to bond prices really far out,” she said. “If you go out on the longer side of duration, you’re taking on more price risk.”

However, Main Management CEO Kim Arthur said he finds long-term bonds attractive as part of a barbell strategy. Long-term bonds, he said, are a valuable hedge against a recession.

“It’s a portion of your allocation, but not the entire part, because, as we know, over the long haul equities will significantly outperform fixed income,” he said. “They’ll give you that inflation hedge on top of it.”

Gallegos, when asked whether the 60/40 stock/bond ratio is dead, said it was true a year ago, but not anymore.

“That was … before the Fed increased rates 425 basis points last year, so everything shifted in terms of yields year over year,” she said.

As of Friday’s close, the U.S. 10 Year Treasury was yielding around 3.7% — an 84% surge from one year ago. Meanwhile, the U.S. 6 Month Treasury yield was around 5.14%, which reflects a one-year jump of 589%.