Bonds - Interest Rate Hedged

To opt for the most relevant strategy to reduce interest rate risk, investors will manage their expectations by taking a view on the drivers impacting their investment

• the trend in interest rate
• the trend in credit risk, which is the spread between corporate bonds and Treasuries

To eliminate (most) rate risk, blunt strategies will favor

• short duration bonds (reducing sensitivity of the bond portfolio to rate changes)
• floating-rate bonds (increasing interest rate payments, in sync with rising Treasury rates)

These strategies are ‘blunt’ because, to “play it safe”, they also dampen the potential advantage of tightening credit spreads (which would benefit corporate bonds) and they ignore alternative factors impacting credit spread itself

Alternative strategies take a view on the relevance of the credit spread in the investment

• If the spread is expected to tighten because growth is expected to accelerate, a positive for corporates and emerging markets, a hedge on their rate exposure while benefiting from their credit risk exposure will be favorable
• If growth is not expected to accelerate, anticipation of long-term rate movements will swamp potential credit spread tightening benefit (if any) -
  • calling for protection against increase in expected long-term inflation  with funds such as ProShares Inflation Expectations ETF
  • tightening the focus on the volatility of long-term interest rates with derivative strategies such as Simplify Interest Rate Hedge ETF 
  • or anticipating a steepening of the yield curve with the Quadratic Interest Rate Volatility and Inflation Hedge ETF

Select time frames between 1 week and 1 year to evaluate trends - top right tab 

The iShares Floating Rate Bond ETF   which tracks an index of investment-grade floating rate bonds (with remaining maturities between one month and five years) is linked to the  theme, for comparison with the constituents