Investors finally seem to be buying into the idea that the Federal Reserve will raise interest rates into restrictive territory and stay at that high rate for some time. The results of a recent CNBC survey show that the average respondent thinks the US central bank will raise interest rates by 75 basis points at its meeting on Wednesday, which would take the federal funds rate to 3.1. %.
The Fed is expected to continue raising rates until the rate peaks in March 2023 at 4.26%. The new peak rate forecast is an increase of 43 basis points from CNBC’s July survey.
The Fed has raised interest rates four times this year for a total of 2.25 percentage points. These increases included two increases of 0.75 percentage points in June and July.
With the Fed expected to continue raising rates through March 2023, respondents are increasingly concerned that the US central bank is over-tightening and triggering a recession. Responding to the survey, Bleakley Financial Group CIO Peter Boockvar wrote: “I fear they are about to overdo the aggressiveness of their tightening, both in terms of the magnitude increases and (quantitative tightening) and the speed at which they do so.
Fixed income investors worried about rising rates and a possible recession might consider actively managed bond ETFs like the Avantis Short Term Fixed Income ETF (AVSF)the American Century Diversified Corporate Bond ETF (KORP)and the American Century Diversified Municipal Bond ETF (TAXF).
AVSF invests primarily in investment grade debt securities from a diversified group of US and non-US issuers with shorter maturities. The fund’s portfolio managers seek out bonds with high expected returns through a process that uses an analytical framework, which includes an assessment of each bond’s expected income and capital appreciation.
AVSF, which has a loading rate of 0.15%, is aiming for an average maturity of three years.
KORP, on the other hand, offers investment-grade debt securities. The fund seeks current income with an emphasis on higher quality debt while aggressively allocating a portion of the portfolio to high yield.
According to its product website, KORP creates a systematically managed portfolio that incorporates fundamental and quantitative expertise that: adjusts investment-grade and high-yield components to balance interest rate and credit risk; screens individual credits to look for those with strong fundamentals, reduced risk of default, attractive valuations and liquidity; and adjusts sector and duration exposures as risks and opportunities arise.
Finally, TAXF seeks to provide consistent tax-free income by employing an active research-driven process that taps into the universe of municipal bonds and adjusts exposure based on market conditions. As with local government bonds in the US, credit risk is minimized with nearly 80% of the fund’s debt rated AAA to A (as of May 31).
Both KORP and TAXF have an expense ratio of 0.29%.
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