As the fed funds rate reaches its highest level since 2007, the broader market sinks. With more hikes likely on the horizon, consider short-duration fixed income for less exposure to changes in interest rates.
This article was written with contributions from Maciej Rabiniak. Maciej is a Research Analyst on the SPDR Americas Research Team.
Equities and fixed income resumed their downward trend last week as hotter-than-expected Consumer Price Index (CPI) inflation sent 10- and 2-year Treasury yields to highs not seen in more than a decade.1 As broad equities fell, only Energy, Industrials, and Materials had positive returns.
Leadership on the Ballot
The 2022 US midterm elections were held on Tuesday. All 435 US House seats and 35 of the 100 Senate seats were on the ballot. Final results for some of the more hotly contested races could take days.
Former Israeli Prime Minister Benjamin Netanyahu’s coalition has won a majority of seats in the 120-seat parliament, the Knesset, setting the stage for him to return to power.2 This is Israel’s fifth election in four years.
In Denmark, the center-left “red bloc” has secured the most votes in a general election. It is widely seen as a confidence vote in Prime Minister Mette Frederiksen.3
United Nations Climate Change Summit Begins
The 27th Conference of the Parties of the UNFCCC, more commonly known as COP 27, is in session in Sharm el-Sheikh, Egypt. Over the next two weeks, attendees will assess progress made toward the commitments agreed at COP 26 and discuss coordinated global actions to address climate change.
Central Banks Continue Rate Hikes
Targeting inflation, the Bank of England raised its benchmark rate by 75 basis points (bps), its largest hike in 33 years.4 US markets are adjusting to the Federal Reserve’s (Fed) most recent hike, also 75 bps. Year-over-year US CPI figures will be released on Thursday, and current expectation is that it will moderate to 8.0%, down 0.2% from last month’s reading.
Meanwhile, Russia has returned to the United Nations-brokered deal to safely ship Ukrainian grain through the Black Sea. Only time will tell the impact this will have on food prices.
Aggressive Fed Moves Lead to Defensive Yield Opportunities
Another 75 bps rate hike pushed the fed funds rate to its highest level since 2007 — and the market expects another 50 bps hike in December.5 A hike at yearend would make 2022 the Fed’s most aggressive policy year ever. Chairman Powell recently indicated his more aggressive stance, saying “it is very premature to be thinking about pausing” and “incoming data suggests the ultimate level of rates will be higher than previously expected.”6
Higher rates have fueled broad-based portfolio losses and wide-spread market dislocations. These dislocations are leading to attractive defensive yield opportunities on the short end of the curve, namely Treasurys with less than one year of maturity, given the recent inversion of the 3-month and 10-year yield spread.7
As a result of the Fed’s aggressiveness, and the likelihood of more to come, yields on 3-12 month T-Bills are now higher than those maturing in three years and beyond. Given the maturity band, the rate risk for this exposure is minimal (see chart). This is a potentially attractive trade-off when compared to the 1-3 year Treasury market — the only portion of the curve with a higher yield — as 3-12 month T-Bills have a higher yield per unit of duration. The lack of duration from this defensive yield curve tenor has also limited duration-induced price declines this year (+0.29% versus 1-3 year Treasury’s -4.90% year-to-date return8). That could continue if the Fed follows through on its hawkish rhetoric.
3-12 Month T-Bills Exhibit Higher Yield Per Unit of Duration
The SPDR® Bloomberg 3-12 Month T-Bill ETF (BILS) may help investors capture generationally elevated income levels while seeking to preserve capital amid today’s economic and monetary policy uncertainty. BILS has also grown 17-fold in 2022, as AUM increased from $20M to $373M as of November 4, 2022.9
BILS Standard Performance as of September 30, 2022
1 Bloomberg Finance, as of November 4, 2022. 2 Bloomberg Finance, as of November 2, 2022. 3 Bloomberg Finance, as of November 2, 2022. 4 Bloomberg Finance, as of November 3, 2022. 5 Bloomberg Finance, L.P., as of November 5, 2022, based on Fed Funds Futures pricing. 6 Bloomberg, “Powell Sees Higher Peak for Rates, Path to Slow Tempo of Hikes,” November 2, 2022. 7 Bloomberg Finance, as of November 5, 2022. 8 Bloomberg Finance, L.P., as of November 5, 2022. Based on the return of the Bloomberg US 3-12 Month Treasury Index and the Bloomberg US 1-3 Year Treasury Index. Past performance is not a reliable indicator of future performance. 9 Bloomberg Finance, L.P., as of November 4, 2022.
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