We are seeing an unprecedented steepening of the Treasury yield curve especially from the medium (3 years onward) to the the long-end (the 30-year mark). The long-end portion is gonna be heavily affected by the yield curve that is steepening. Steepening here means the interest rate (IR) is going up. When the IR goes up, the present value factor of the IR decreases, especially for the interest payments and principals that are pending and due furthest out. A 20-year US Treasury Bond that makes interest payments semiannually for 20 years and the principal 20 years out, is gonna be heavily discounted when the 20Y bond interest rate goes up from 4.0% on the FOMC meeting day (Sept. 18) to 4.55% yesterday. Check out the yield curve change from Sept. 18 (blue) to Oct. 22 (red), yesterday. The intersection at the 6-month mark shows that the interest rates (red) are higher from that point on, thus lowering the values of your Bond ETFs. Yet the YC is threatening to steepen even further and when that happens, we could go near 5% or beyond and our bond funds could be crushed. So what should we do?
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There are three options:
Option 1. Stick to the shortest portion of the Treasury yield curve for your taxable accounts (you want to avoid state taxes): i.e., (a) 0-3 Months US Treasury Bill ETFs: SGOV / BIL. Or (b) US Floating Rate Note (FRN) ETFs: USFR / TFLO. Or something like (c) 0-12 Months US Treasury Bill ETFs: SHV / BILS / TBLL. (a) and (b) are the best options and you can avoid having your price impacted by the steepening yield curve. At that short end of the YC, there is no steepening -- i.e., the IR is not going higher -- and the YC is still inverted.
Option 2. For your non-taxable accounts, focus on Corporate Floating Rate Note (FRN) ETFs: FLOT/ FLRN / FLTR / VRIG. Or I would go into a very short 1-5Y corporate bond ETF like PULS, which is frontloaded and has an effective duration of 0.21 or only 2.5 months. Even at 0.5 or at 6 months, the IR increased from 4.45 to 4.47%, even though the impact on the bond price would be pretty negligible.
Option 3. Just buy 3-month (or any length) US Treasury Bills from your broker and hold them to maturity. Easier to hold onto the shortest maturity US Treasury and the highest-yielding US Treasury happens to be the 3-month US T-Bills, despite the steepening that's occurring from the 3 year to the 30-year mark.
There are three options:
Option 1. Stick to the shortest portion of the Treasury yield curve for your taxable accounts (you want to avoid state taxes): i.e., (a) 0-3 Months US Treasury Bill ETFs: SGOV / BIL. Or (b) US Floating Rate Note (FRN) ETFs: USFR / TFLO. Or something like (c) 0-12 Months US Treasury Bill ETFs: SHV / BILS / TBLL. (a) and (b) are the best options and you can avoid having your price impacted by the steepening yield curve. At that short end of the YC, there is no steepening -- i.e., the IR is not going higher -- and the YC is still inverted.
Option 2. For your non-taxable accounts, focus on Corporate Floating Rate Note (FRN) ETFs: FLOT/ FLRN / FLTR / VRIG. Or I would go into a very short 1-5Y corporate bond ETF like PULS, which is frontloaded and has an effective duration of 0.21 or only 2.5 months. Even at 0.5 or at 6 months, the IR increased from 4.45 to 4.47%, even though the impact on the bond price would be pretty negligible.
Option 3. Just buy 3-month (or any length) US Treasury Bills from your broker and hold them to maturity. Easier to hold onto the shortest maturity US Treasury and the highest-yielding US Treasury happens to be the 3-month US T-Bills, despite the steepening that's occurring from the 3 year to the 30-year mark.
Statistics: Posted by Randle2Hard2Handle — Wed Oct 23, 2024 1:21 am — Replies 0 — Views 42