The Federal Reserve (Fed) raised rates another 75 basis points to its highest level in a decade, as the committee voted unanimously to aggressively fight inflation. For investors looking to preserve capital amid the economic and monetary policy uncertainties, targeting an active ultra-short duration fixed income strategy may be beneficial.
This article was written with contributions from Maciej Rabiniak. Maciej is a Research Analyst on the SPDR Americas Research Team.
Markets trended upward last week, despite the US entering a technical recession. Energy and Utilities, the two best performing US sectors, reported gains of 10.4% and 6.5%, respectively. China was the only major region to record a loss last week, largely due to a slow recovery following weeks of lockdowns.
US Enters Technical Recession
Americans brace themselves as the US economy entered a technical recession last week. This occurred after gross domestic product (GDP) decreased 0.9% in the second quarter, following a first quarter decrease of 1.6%.1
Big Tech Earnings Fall Short
Several big tech companies reported Q2 earnings last week. While Apple exceeded expectations, earnings for Microsoft, Alphabet, Amazon, and Meta Platforms came in below their forecasts.2 More earning reports will be released this week, with results expected from BP, Cat, EA, Starbucks, Uber, Yum, and others.
Europe Inflation Climbs Again
After hitting a record-breaking high last week, European inflation climbed to another all-time high (8.9%).3 The continued increase of Euro-zone inflation supports the calls for the European Central Bank (ECB) to follow up its first interest-rate hike since 2011 with another big move.
As the market delivers losses and growth decelerates, investors will need to navigate the economic and monetary policy uncertainties. A strategy targeting active ultra-short duration fixed income may be beneficial.
Implementation Idea: SPDR® SSGA Ultra Short Term Bond ETF (ULST)
During the last Fed tightening cycle between 2016 and 2018, ULST had a max drawdown of only -0.55% and outperformed both the Agg and short-term Treasuries by 105 and 285 basis points, respectively, speaking to its potential to help investors navigate a higher rate environment.4
Since the first rate hike this year, ULST’s SEC yield has increased from 0.64% to 2.18%, while duration remained roughly unchanged.5 SPDR SSGA Ultra Short Term Bond ETF (ULST) may help investors maximize current income by actively selecting from a broad range of fixed and floating-rate investment-grade securities, while preserving capital in a higher rates environment.
As a result of its expanded sector reach, credit selection, and risk management process, ULST had a more attractive yield-per-unit-of-duration profile than major fixed income segments (see graph below).6
Index returns are unmanaged and do not reflect the deduction of any fees or expenses. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income as applicable.
Source: Bloomberg Finance, L.P., SSGA, as of July 28, 2022. US High Yield = Bloomberg VLI High Yield Index. Investment-Grade Corp = Bloomberg US Corporate Index. Agg = Bloomberg US Aggregate Bond Index. Treasuries = Bloomberg US Treasury Index. ULST yield is the 30-Day SEC Yield. US 3-Month Treasuries, US High Yield, Investment-Grade Corp, Agg, and Treasuries yield is the yield to worst. Past performance is not a reliable indicator of future performance.
ULST Standard Performance as of June 30, 2022
1 Bloomberg Finance, L.P., as of July 29, 2022 2 Bloomberg Finance, L.P., as of July 29, 2022 3 Bloomberg Finance, L.P., as of July 29, 2022 4 Bloomberg Finance, L.P., Period: December 1, 2015 – November 30, 2018. Short-term Treasuries represented by Bloomberg US Treasury 1-3 Year Index. The Agg represented by: Bloomberg US Aggregate Bond Index. Total return for SPDR SSGA Ultra Short Term Bond ETF (ULST) was 4.75%; for Bloomberg US Treasury 1-3 Year Index was 1.90%; and for Bloomberg US Aggregate Bond Index was 3.70%. Past performance is not a reliable indicator of future performance. 5 SSGA, Period: March 16, 2022 – July 28, 2022. Past performance is not a reliable indicator of future performance. An annualized yield that is calculated by dividing the investment income earned by the fund less expenses over the most recent 30-day period by the current maximum offering price that does not take into account expense ratio subsidizations. 6 Bloomberg Finance, L.P., SSGA, as of July 28, 2022. Past performance is not a reliable indicator of future performance.
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