Investor sentiment towards medium-term Treasuries may change.
David Potsitt of Schwab Asset Management is seeing more flows into bonds with maturities that typically range between three and five years — and sometimes up to 10 years.
“People are starting to realize that we have reached the peak of interest rate increases,” the company's head of innovation and stewardship told CNBC's “ETF Edge” this week. “So, they are looking to reposition the fixed income portion of their portfolio to take advantage of where interest rates are likely to go next.”
It's a shift from last year when short-term bonds and money market funds saw big inflows. Unlike in 2023, more investors are trying to come up with a game plan for when the Federal Reserve cuts interest rates — which could happen as soon as this year.
“When interest rates go down at that point, you don't just get income from that [intermediate-term] “Bonds, they get price appreciation because bond yields and bond prices are the opposite,” Potsit said.
In the middle of the yield curve, “this is less likely to happen,” he added. [rates] to go down, and you'll be able to get that return for a longer period of time.”
But Nate Geraci, head of ETF Shop, cautions against betting too big on the Fed's next move.
“Taking some risks over the long term makes sense, but I wouldn't get too far behind the curve,” he said. “Dynamics of risk and return [of] “Being too far away in the long run doesn't make sense to me.”
“It's not a sure thing”
Geraci believes the Fed's fight against inflation is far from over, and that could change the timeline for interest rate cuts.
“If you start to get out of the curve, you're betting that the Fed is going to do everything right this time. And they may very well do it…but it's not a sure thing,” Geraci said. “Inflation data could continue to come in hot. The last reading we saw was higher than the market expected. So, the Fed may stay higher for longer, and I think you have to be aware of that as an investor.”
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