For a bond investor, the yield curve is crucial as it plots the movement of yields of securities across maturities at a specific date. Higher rate expectations usually boost the yields of short-dated bonds more than those of bonds with longer maturity. Similarly, the reverse happens when the market expects rate cuts. According to Invesco, maturity-targeted ETFs allow investors to navigate their exposure to the yield curve.
The asset manager explains that maturity-targeted ETFs aim to catch the performance of bonds within a set range of maturities and enable investors to align their exposure more specifically to their objectives. Thus, an investor could choose a single ETF with a profile meeting their requirement or combine ETFs for optimal results.
Invesco analyses the Fed’s interest rate hike cycle to explain the yield curve and investor behaviour better. The asset manager believes that in the current cycle, interest rates in most of the developed economies are at or quite close to their peak. It further emphasised, “Investors predict a soft landing, presumably where inflation continues to ease without the impact of previous rate hikes crushing economic growth.”
However, the US Treasury yield curve presents a contrary picture, according to Invesco. The 10y-2y yield curve is inverted signalling a recession. Hence, investors have become cautious. As per Invesco, “Many investors started increasing duration in Q2, first primarily into the 7-10-year range and then, especially in Q3, into the 10+ year bucket. Q3 net flows into US Treasury ETFs by maturity range.”
Paul Syms, Head of EMEA ETF at Invesco highlighted that several investors have also opted for a barbell strategy recently. “This strategy involves investments in both the longer end of the curve (to increase duration) and the shorter end of the curve (to increase yield and partially balance the longer duration exposure),” elucidated Syms.
Finally, the asset manager informs investors that choosing the target maturities would depend on their need for yields. However, it might also be led by the outlook on future rates and inflation.
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