With inflation readings hitting 40-year highs, interest rates have already begun their ascent to higher ground. Here in 2022, a new and very important catalyst for further rate increases has emerged: the Federal Reserve (“Fed”). The U.S. central bank has made it abundantly clear it will be raising rates in 2022, with the risk being that such increases could occur at a swifter pace as the year progresses.
Although interest rates have risen from their pandemic-related trough, they remain historically low and are poised to move higher in the years to come. The combination of Fed rate hikes and continued elevated inflation requires a proactive investment approach that can help mitigate such risks for portfolios. WisdomTree offers solutions that are designed to help investors navigate through this challenging environment.
1. A Strategic Solution for Rising Rates: The Barbell Strategy
While the barbell approach is a strategic solution for fixed income investing, we believe it’s particularly valuable in a rising rate environment. Decades-high inflation readings have already begun the march toward higher rates, but investors are now confronted with a new catalyst in this process: the Federal Reserve (“Fed”). In fact, the Fed has signaled its intention to not only begin raising rates sooner, and potentially more, than previously expected, but it has also stated it plans to begin reversing other stimulus measures that were put in place to combat the negative effects of the pandemic.
As a result, interest rates appear to be poised to continue their ascent to higher ground. In this market setting, we believe it’s prudent to mitigate overall duration risk by implementing a solution that reduces it or hedges it out.
The WisdomTree Barbell Strategy
When USFR, AGZD or HYZD is used in conjunction with our yield-enhanced core strategy, AGGY, we believe it's possible to generate the yield of the Bloomberg U.S. Aggregate Bond Index (Agg), if not more with some pairings, while significantly reducing duration, or interest rate risk. Investors may also want to consider combining our three rate-hedge solutions with their current core bond holdings in an "open-architecture" approach.
Watch this video to learn more about the WisdomTree Barbell strategy, how it works and the tool you can use to see the impact of various fixed income allocations in your portfolio.
Commentaries from Our Thought Leaders
The markets don’t seem to be debating whether the U.S. economy will enter into a Fed-induced recession but rather just how shallow or deep any downturn may ultimately be. Kevin Flanagan provides his take on this debate.