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How to protect yourself from bond market pain

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How to protect yourself from bond market pain

It has been a rough few weeks for bond investors. With more uncertainty to come, it might be time to look at some hedging options.

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This was supposed to be the time when long-suffering fixed-income investors finally earned their reward. After forcing bondholders to endure months of "higher-for-longer," the Federal Reserve finally cut interest rates last month.

While short-term rates have declined, investors have sold off longer-dated bonds, sending yields on the 10-year Treasuries to 4.31% Tuesday from just over 3.6% in mid-September. Bond investors have been taking it on the chin. The iShares Core U.S. Aggregate Bond exchange-traded fund, a popular broad-market bond fund, has posted a negative 2.7% return in the past month.

TickerSecurityLastChangeChange %
AGGISHARES CORE U.S. AGGREGATE BOND ETF - USD DIS98.53+0.09+0.09%

PRIVATE SECTOR JOBS JUMP IN OCTOBER

 

iShares Core U.S. Aggregate Bond ETF

Even more dramatic has been the wild ride of iShares 20+ Year Treasury Bond ETF. The fund made headlines when it rallied nearly 8% in the weeks before the Fed lowered rates in mid-September. Since then, it's given back all those gains and more, having tumbled 9% since its Sept. 16 high. (Bond prices move in the opposite direction as yields.)

MORE ON ETF NEWS: FOXBUSINESS.COM

TickerSecurityLastChangeChange %
TLTISHARES 20+ YEAR TREASURY BOND ETF - USD DIS92.03+0.14+0.15%

iShares 20+ Year Treasury Bond ETF.

One reason for the recent surge in yields may be that investors' attention has shifted to the presidential election. That has been a popular theory on Wall Street since the 10-year's decline has coincided with an uptick in former President Donald Trump's poll numbers and odds in the prediction market. Investors worry Trump's tariffs proposals could cause a resurgence in inflation, while his proposed tax cuts have been projected to add about twice as much to the national debt as Vice President Kamala Harris's proposals.

 

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Trump and Harris get economic fact-check

Both former President Donald Trump and Vice President Kamala Harris have been campaigning similar stances on issues this election cycle. (Fox News/Getty Images / Fox News)

Either way, the coming week could be critical for bonds. Even before Election Day on Nov. 5, investors will need to digest a slew of economic reports this week, including the personal consumption expenditures price index Thursday (economist forecast a 2.1% year-over-year increase) and the October jobs report on Friday (consensus calls for a 108,000 increase in nonfarm payrolls.)

"Put your seats and tray tables in their upright position, through our 40 years, we can't recall an 8 -- 9-day period with more important economic and policy scheduled events," wrote Ironsides Macroeconomics analyst Barry Knapp in a note Saturday.

 

The upshot: It may be time for bond market investors to look for ways to hedge their bets, if they are unwilling to ride out further volatility. One possibility is an exchange-traded fund like Global X Interest Rate Hedge ETF, which uses long interest-rate swap options, among other bets, to help investors guard against sharp increases in long-term interest rates.

TickerSecurityLastChangeChange %
RATEGLOBAL X INTEREST RATE HEDGE ETF - USD DIS H19.79+0.02+0.11%

Global X Interest Rate Hedge ETF

The fund looks good at first glance -- it's up 14% in the past month. But it's extremely risky. Even after the past month's rally, it has returned negative 33% in price terms over the past year, according to Morningstar. Its net-asset value decline is less severe, just 14% in the past year. But such a large gap between price and NAV returns is in itself a potential red flag. (A spokeswoman for Global X didn't respond to a request for comment.

TickerSecurityLastChangeChange %
LQDHISHARES US ETF TRUST INT RATE HDGD CORPORATE BD93.17+0.00+0.00%

iShares Interest Rate Hedged Corporate Bond ETF

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A better bet may be a fund like iShares Interest Rate Hedged Corporate Bond ETF, which aims to deliver returns of a corporate bond index, while dampening interest-rate risk. The fund has returned about 0.8% this month. Of course, in the longer run, if rates do finally start to drift down, that extra protection could cost investors. Over the past 12 months, the fund has returned just 10%, compared with 14% for its unhedged sibling, iShares iBoxx $ Investment Grade Corporate Bond ETF.

 
TickerSecurityLastChangeChange %
GLDSPDR GOLD SHARES TRUST - USD ACC256.08+2.77+1.09%
Gold bars central bank

Gold bars are presented at the German Central Bank in Frankfurt am Main, central Germany on August 23, 2017.  (Photo by ARNE DEDERT/dpa/AFP via Getty Images / Getty Images)

Investors who don't want to monkey with their bond portfolios, however, have another option: Gold. The yellow metal is near record highs. Still, if the market is truly worried about inflation reigniting, gold could stand to benefit further. It has certainly performed the roll over the past several weeks -- while bonds languished in October, gold has surged 4.5%.

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Write to Ian Salisbury at [email protected]

 

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

October 29, 2024 16:20 ET (20:20 GMT)

 
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Olivia Smith

Olivia Smith

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