Market Pulse: Positioning for rising rates |

Market Pulse: Positioning for rising rates

David Vomund

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 7 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 percent 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 percent 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.

When it comes to interest rates, I’m not concerned about a continued sharp increase from here. While the economy is strong, growth here and abroad is expected to slow. Nevertheless, the trend in rates is higher.

Eventually higher rates will be good news for savers because their new bond investments will yield more. But for now it’s best to concentrate portfolios on investments that can do well even as rates rise.

That’s why the securities in this article are worth a closer look.

David Vomund is an Incline Village-based fee-only money manager. Information is found at or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial advisor before purchasing any security.

Support Local Journalism

Support Local Journalism

Readers around the Lake Tahoe Basin and beyond make the Tahoe Tribune's work possible. Your financial contribution supports our efforts to deliver quality, locally relevant journalism.

Now more than ever, your support is critical to help us keep our community informed about the evolving coronavirus pandemic and the impact it is having locally. Every contribution, however large or small, will make a difference.

Your donation will help us continue to cover COVID-19 and our other vital local news.

Start a dialogue, stay on topic and be civil.
If you don't follow the rules, your comment may be deleted.

User Legend: iconModerator iconTrusted User


California farmers told drought could cut off their water


SACRAMENTO, Calif. — Thousands of Central California farmers were warned Tuesday that they could face water cutoffs this summer as the state deals with a drought that already has curtailed federal and state irrigation supplies.

See more