Inflation continues to be a problem for the United States, meaning investors are still very concerned about interest rate risk. Unfortunately, most bond funds focus on maturity dates rather than interest-rate-sensitive duration. But the good news is that new funds could change these dynamics and give investors more control.
Let’s examine why duration matters in today’s fixed income climate and how target duration funds can help optimize your portfolio.
Don’t forget to check our Fixed Income Channel to learn more about generating income in the current market conditions.
Interest Rate Risk Still on the Rise
The annual inflation rate fell for a second straight month to 8.3% in August, but core inflation accelerated to 6.3%, suggesting that inflationary pressure remains in the economy. Core inflation removes the impact of volatile food and energy prices from the inflation calculation.
In response, the Federal Reserve increased the federal funds rate for its third straight meeting. The central bank hiked rates by 75 basis points to the 3.00% to 3.25% range, the highest level since 2008. The CME’s FedWatch tool projects that interest rates will continue to rise to the 4.50% to 4.75% range by the February 2023 meeting.
Investors Look to Reduce Duration
Bond prices and interest rates move in opposite directions. After all, if you own a bond paying a 2% interest rate and rates rise, then the 2% yield doesn’t look as attractive. And, of course, investors will sell these less attractive bonds to capitalize on new issues with higher interest rates, resulting in lower prices for them on the open market.
Many investors use duration to measure interest rate risk. In short, duration is a bond’s weighted average time until all of its cash flows are paid (in years). By accounting for the present value of future bond payments, duration helps investors evaluate and compare bonds independent of their term while accounting for interest rates.
Check out all U.S. Treasury bond based mutual funds and ETFs here.
New BondBloxx Target Duration Funds
BondBloxx Investment Management recently launched eight target duration funds focused on U.S. Treasuries. In particular, the funds track a subset of duration-constrained U.S. Treasury bonds with more than $300 billion outstanding. As a result, investors can achieve target durations using Treasuries without using maturies.
“In today’s rapidly changing interest rate environment, key priorities for portfolio managers and investors are earning higher yields on strategic cash positions, precisely managing duraiton risk, and having effective collateral tools,” said JoAnne Bianco, BondBloxx Client Portfolio Manager, in a news release announcing the new funds.
The new products include:
| Name | Ticker | Expense Ratio |
| BondBloxx Bloomberg Six Month Target Duration US Treasury ETF | XHLF | 0.03% |
| BondBloxx Bloomberg One Year Target Duration US Treasury ETF | XONE | 0.03% |
| BondBloxx Bloomberg Two Year Target Duration US Treasury ETF | XTWO | 0.05% |
| BondBloxx Bloomberg Three Year Target Duration US Treasury ETF | XTRE | 0.05% |
| BondBloxx Bloomberg Five Year Target Duration US Treasury ETF | XFIV | 0.05% |
| BondBloxx Bloomberg Seven Year Target Duration US Treasury ETF | XSVN | 0.05% |
| BondBloxx Bloomberg Ten Year Target Duration US Treasury ETF | XTEN | 0.08% |
| BondBloxx Bloomberg Twenty Year Target Duration US Treasury ETF | XTWY | 0.13% |
The Bottom Line
Duration is a critical consideration for investors as interest rates continue to rise. Fortunately, new target duration funds from BondBloxx make it easier than ever to invest in specific U.S. Treasuries based on their duration rather than relying on maturity or other less accurate factors regarding mitigating interest rate risk.
Take a look at our recently launched Model Portfolios to see how you can rebalance your portfolio.
