Investor sentiment toward medium-term Treasuries may be changing.
Schwab Asset Management’s David Botset has found greater inflows into bonds with maturities typically ranging from three to five years, and sometimes as long as 10 years.
“People are starting to realize that we’re at the peak of interest rate hikes,” the firm’s head of innovation and stewardship said this week on CNBC’s “ETF Edge.” “So they’re looking to reallocate to the fixed income portion of their portfolios, to take advantage of possible next moves in interest rates.”
That’s a departure from last year’s massive inflows into short-term bonds and money market funds. Unlike 2023, more investors are trying to strategize for a rate cut by the Federal Reserve – which could happen as early as this year.
“When interest rates fall to this level, not only do you get income from (medium-term) bonds, you get price appreciation because bond yields and prices work in opposite directions,” Bossert said.
He added that in the middle of the yield curve, “(rates) are less likely to come down and you’ll be able to earn that yield over a longer period of time.”
But ETF Store President Nate Geraci warned against betting too much on the Fed’s next move.
“It makes sense to take some duration risk, but I wouldn’t go too far on the curve,” he said. “The risk-reward dynamic doesn’t make a lot of sense to me over the long term.”
“uncertain”
Geraci believes that the Fed’s fight against inflation is not over yet, which may change the timetable for interest rate cuts.
“If you start going up the curve, you’re betting that the Fed is actually going to get it all right this time. They’re probably going to … but it’s not a sure thing,” Geraci said. “Inflation data It may still be hot. The last print we saw was priced higher than market expectations. So the Fed may be able to maintain higher levels for a longer period of time, and I think you have to recognize that as an investor. “
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