Revisiting Interest Rates and Fixed Income in Spring 2024


May 3, 2024

By Ambrose O’Callaghan

The strategy of the United States Federal Reserve and its peers in the developed world had seemingly come into focus coming into 2024. In 2023, several statements from Fed chairman Jerome Powell led investors to believe that the first of several interest rate cuts were set to arrive in the first half of the new year. However, it now appears assured that the first interest rate cut will occur in the second half of the year, and we may only see one or two moves downward for the full year.

Does this change the game for investors in 2024? Not necessarily. Today, I want to explore the current inflation and interest rate climate and discuss why Fixed Income has a place  in your portfolio.

Where are interest rates headed in 2024?

The US Federal Reserve has not moved on interest rates so far in 2024. Indeed, some traders have built up bets that the Fed could raise interest rates again. That prospect would have been viewed as unthinkable in mid-to-late 2023. However, a shift in market expectations and a strong US economy has dialed in a hawkish tone from central bankers. According to the Financial Times, options markets now suggest that there is roughly a one in five chance of a US interest rate increase within the next 12 months. That is up significantly compared to odds in the beginning of 2024.

This shift in the expectations for the rate environment has impacted bond markets. Indeed, interest rate-sensitive 2-year Treasury yields – which move inversely to bond prices – reached a five-month high of 4.97% at the end of April. Meanwhile, US equities incurred a long losing streak before returning to the black on Monday, April 22, 2024.

Interest rates have stayed flat at the Fed. However, interest rates on 10-year and 20-year US bonds have moved up in the year-to-date period. For example, the 10-year bond is up from 3.85% to 4.86% as of close on April 29, 2024. That is a 1.01 percentage points increase compared to the beginning of 2024. A longer dated bond, for example with a duration of 16, will be sensitive to the movements in that rate move. Typically, a duration of 16 means for a 100-basis point move in the rate, the bond price would move up roughly 16%. This explains why the spot price of some bond exchange-traded fund (ETF) products are down.

How have Harvest fixed income ETFs performed?

Harvest ETFs launched its first fixed income ETF, the Harvest Premium Yield Treasury ETF (HPYT:TSX), in September 2023. HPYT is a portfolio of ETFs which holds longer dated US Treasury bonds that are secured by the full faith and credit of the US government. The ETF employs up to 100% covered call writing to generate a higher yield and maximize monthly cash flows.

HPYT’s NAV price has experienced a decline in the current environment. It debuted at $12.00 per unit and was trading at $10.88 per unit as at April 26, 2024. However, HPYT has paid out a monthly distribution of $0.1500 per unit since its inception.

In early January 2024, Harvest ETFs launched the following funds to round out its fixed income lineup.

The Harvest Premium Yield 7-10 Year Treasury ETF (HPYM:TSX)that seeks to provide attractive and tax efficient monthly cash distributions to unitholders by writing covered calls on a portfolio of US Treasury ETFs, that primarily hold mid-duration U.S. bonds with average maturities of 7-10 years.

HPYM provides a “happy medium” for investors who want high monthly cash distributions and the lower duration risk that exists in the intermediate section of the maturity spectrum. HYPM experienced a price drop of 4.3% so far in 2024 as of mid-afternoon trading on Tuesday, April 30, 2024. The ETF has paid out a monthly cash distribution of $0.0800 per unit in the three months that followed its inception date.

For those looking for cash-proxy with zero duration risk from investments in assets with virtually zero default risk, the Harvest Canadian T-Bill ETF (TBIL:TSX) offers that benefit and more. It invests directly in Canadian treasury bills and pays the accrued interest monthly.  As an ETF, it offers the benefits of being traded anytime and it comes with no minimum investment limit.    


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