3 Views On Preparing For Higher Rates

All eyes are on the yield curve as the market braces for the first rate hike in six years.

The market seems to be bracing for the Fed to begin raising rates in September, especially after the latest jobs report, released Friday, showed that a solid 215,000 new jobs were created in July.

If the Fed is indeed ready to make a move, it would be its first rate hike in about six years. Since the 2008 credit crisis sent the U.S. economy into its worst downturn since the Great Depression, the Fed has fostered an environment of ultra-low rates. That no-rate environment is largely credited with an impressive multiyear rally in U.S. stocks, as well as the unleashing of a massive investor hunt for yield.

We turned to three ETF strategists for their views on whether they expect to make asset allocation changes for a higher rate environment. Here’s what we asked:

Does Friday’s jobs report reinforce the idea that a first rate hike is coming in a month? If so, will you change your current allocation plans in any way?

Their views:

Clayton Fresk, portfolio manager at Stadion Money Management based in Watkinsville, Georgia:

The market seems to be reacting as such as the front end of the Treasury curve remains weak. Three-month bills are trading at low levels not seen since early 2014, and six- and 12-month bills are at levels not seen since 2010.

The Treasury curve has also flattened fairly dramatically since mid-July, seeing the 2- to 30-year spread more than 40 basis points lower, as market participants seem to be favoring the long end of the curve once again.

I’ve seen similar themes play out in our positioning, and will continue to monitor the short end of the curve in the upcoming month both for opportunities and signs of further weakness.

David Dziekanski, portfolio manager at Toroso Investment based in New York:

We believe there will likely be a rate hike in the next few months, but that it might be somewhat unwarranted. There are structural issues in the market impeding a traditional growth cycle. This does not affect our allocations at the moment.

We currently believe long-duration bonds could continue to rally, and that the effects of an interest-rate increase would result in a flattening of the yield curve, hurting intermediate-duration bonds harder. This is one of the many reasons we use a barbell approach to generating income.

Mitch Reiner, managing partner at Wela Strategies based in Atlanta:

We have been preparing for rate hikes and how that will affect our different asset classes for a long time now. Now is no different.

More importantly than rate hikes is the effect on the 10-year [Treasury yields]. We look at assets like utilities and closed-end funds that are taking the brunt of punishment because the market is assuming the 10-year will rise, but we think that moves in the short end are not likely going to move the 10-year without much better economic growth globally. We think flattening is more likely than the whole curve moving up together.