Interest Rate Strategies
The Federal Open Market Committee delivered on its highly anticipated rate hike at its September meeting. The Federal Reserve raised rates three times this year and has entered its final phase of the balance sheet normalization. Where do we think the Fed could be headed for the final three months of this year and into 2019?
Just shy of three years ago, we launched the WisdomTree Barclays Yield Enhanced U.S. Aggregate Bond Fund, which seeks to track the yield and performance of the Bloomberg Barclays U.S. Aggregate Enhanced Yield Index. As interest rates started to rise in 2016, investors have questioned whether a strategy that is one year longer in duration than the benchmark is prudent. As we highlight below, we believe our approach continues to deliver value in the core of investor bond portfolios.
In 2013, WisdomTree created a suite of interest rate-hedged fixed income strategies to help investors navigate rising rates. Bradley Krom explains the drivers of return in a rate-hedged position.
On March 21, the Federal Open Market Committee voted to increase the Federal Funds Rate target for the sixth time since December 2015. We highlight the rationale for our highest-conviction fixed income trade over the next two years and why investors should be investing in floating rate Treasuries instead of three-month t-bills.
As expected, the Federal Reserve delivered its first rate increase of the year. Unlike last year’s March rate hike, this latest tightening move by the Fed was widely anticipated. In fact, the money and bond markets are definitely operating under a different mind-set in 2018, assuming the policy makers have just begun this year’s rate hike moves.
Jeremy J Siegel
Senior Investment Strategy Advisor
CEO of WisdomTree
Jeremy Schwartz, CFA
Executive Vice President, Global Head of Research
Christopher Gannatti, CFA
Head of Research, Europe
Christopher Gannatti began at WisdomTree as a Research Analyst in December 2010, working directly with Jeremy Schwartz, CFA®, Director of Research. In January of 2014, he was promoted to Associate Director of Research where he was responsible to lead different groups of analysts and strategists within the broader Research team at WisdomTree. In February of 2018, Christopher was promoted to Head of Research, Europe, where he will be based out of WisdomTree’s London office and will be responsible for the full WisdomTree research effort within the European market, as well as supporting the UCITs platform globally. Christopher came to WisdomTree from Lord Abbett, where he worked for four and a half years as a Regional Consultant. He received his MBA in Quantitative Finance, Accounting, and Economics from NYU’s Stern School of Business in 2010, and he received his bachelor’s degree from Colgate University in Economics in 2006. Christopher is a holder of the Chartered Financial Analyst designation.
Head of Fixed Income Strategy
Tripp Zimmerman, CFA
Head of Fixed Income & Currency
Associate Director, Asset Allocation and Modern Alpha
Head of Capital Markets
Associate Director of Capital Markets
Head of Europe
Joseph Tenaglia, CFA
Associate Director, Asset Allocation
Kara Marciscano, CFA
Jianing Wu joined WisdomTree as a Research Analyst in October 2018. She is responsible for analyzing market trends and helping support WisdomTree’s research efforts. Previously, Jianing completed internships and projects at Geode Capital, Starwint Capital, and Invesco Great Wall Fund Management with a focus in quantitative research. Jianing received her M.S in Finance from the Massachusetts Institute of Technology. She graduated with honors from Boston College with degrees in Mathematics and Philosophy.
Jeff Weniger, CFA
Director, Asset Allocation
Alejandro Saltiel, CFA
Associate Director of Modern Alpha
Alejandro Saltiel joined WisdomTree as a Quantitative Research Analyst in May 2017. He is responsible for quantitative research on WisdomTree’s products and global equity markets. Prior to joining WisdomTree, Alejandro worked at HSBC Asset Management’s Mexico City office as Portfolio Manager for multi-asset mutual funds. He started his career working at a boutique hedge fund that specialized on trading options on sector-levered ETFs. Alejandro received his Master’s in Financial Engineering degree from Columbia University in 2017 and a Bachelor’s in Engineering degree from the Instituto Tecnológico Autónomo de México (ITAM) in 2010. He is a holder of the Chartered Financial Analyst designation.
Matt Wagner, CFA
Modern Alpha Analyst
Matt Wagner joined WisdomTree in May 2017 as a member of the Research team. He is responsible for research on WisdomTree’s products and communicating the firm’s views on the markets. Matt started his career at Morgan Stanley, working as an analyst in Treasury Capital Markets from 2015 to 2017 where he focused on unsecured funding planning, execution and risk management. Matt graduated from Boston College in 2015 with a B.A. in International Studies with a concentration in Economics. Matt is a holder of the Chartered Financial Analyst designation.
As the debate rages surrounding the timing of the first Federal Reserve (Fed) rate hike, we continue to discuss the potential tradeoffs surrounding this inevitable shift in policy. While some investors may be content to ride out the waning bull market in bonds, others may seek to position more tactically.
With the Federal Reserve (Fed) about to lose its patience for a zero interest rate policy and the market possibly largely unprepared for this shift, it is important for investors to develop a plan for their portfolios when interest rates inevitably rise. In our view, zero and negative duration strategies provide notable alternatives that portfolio managers should consider as a way to refine a portfolio’s sensitivity to changes in interest rates.
It should not be surprising that equity returns often dominate the headlines. The total returns of stocks are hypothetically infinite. A business that can generate ever-higher revenues and profits becomes ever more valuable to shareholders. With the possibility of greater upside, of course there must also be a potential for downside.
Over the past several months, we have talked a great deal about how falling interest rates have altered the risk-return trade-offs within the bond market. Over the last several years, falling rates have not only lowered the potential income cushion, but also increased the degree of sensitivity to changes in interest rates.
After a series of stops and starts, comments from a variety of Fed speakers and a slight pickup in some U.S. economic data, the Fed took the opportunity to deliver a dovish surprise at its March 18 policy meeting.