Investor sentiment about intermediate-term Treasury bonds may change. David Botset of Schwab Asset Management is seeing increasing transactions in bonds with three- to five-year maturities, sometimes 10 years.
“People are starting to realize that we’re kind of at the peak of interest rate increases,” the firm's head of innovation and stewardship told CNBC's “ETF Edge” this week. They want to rearrange their fixed-income portfolio to capitalize on where interest rates are headed.
It contrasts with last year's huge inflows into short-term bonds and money market funds. More investors are planning for a Federal Reserve rate cut this year than in 2023.
Botset argued that when interest rates drop, you get income from the intermediate-term bond and price appreciation because bond yields and prices are inversely related.
He added, “less likely for [rates] to come down, and you’ll be able to capture that yield for a longer period of time” in the middle of the yield curve.
The ETF Store president Nate Geraci advises against betting too much on the Fed's next move.
“Taking some duration risk makes sense, but I wouldn’t go too far out on the curve,” he said. I don't understand the risk-return mechanics of getting too far out on the long end. Geraci thinks the Fed's fight against inflation will continue, which might delay rate reduction.
“Going out on the curve means betting that the Fed will get everything right this time. Indeed, they may... But that's not guaranteed, Geraci warned. “Inflation data may remain hot. The last print exceeded market expectations. As an investor, you should be aware that the Fed may stay higher longer.
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