The Yield Curve in 2025: Striking a ‘Happy Medium’

Date

March 14, 2025

Date

March 14, 2025

Date

March 14, 2025
By Ambrose O’Callaghan

Harvest Fixed Income ETFs are designed to cover the entirety of the maturity spectrum: short, medium, and long durations. Today, I want to zero-in on the core fixed income holding in the Harvest fixed income stable: The Harvest Premium Yield 7-10 Year Treasury ETF (HPYM:TSX).

A macro update in March 2025

The United States Federal Reserve stopped cutting overnight rates in the U.S. after its third interest rate cut in December 2024. Economic data had remained in good shape. Because of this, the market became convinced the “soft landing” scenario had been assured to kick off the New Year. A “soft landing” occurs when central banks are able to avoid a recession after passing through a monetary tightening cycle.

Inflation had remained sticky, and at much higher levels than was comfortable for the Federal Reserve members in recent quarters. Indeed, it looked like inflation might inflect higher, especially with the policies that were being discussed by President-Elect Donald Trump at the time.

Overnight rates have yet to be touched in the U.S. through the first three months of 2025. Expectations have dropped to as low as just one more cut by the end of 2025. We have seen increased volatility emerge in the wake of now-President Trump’s government efficiency cuts. Moreover, the deluge of tariff announcements has led to heightened trade tensions. Now, expectations have shifted to the possibility for a period of “detox” – or economic slowdown/recession.

Markets have reacted negatively, anticipating additional Fed overnight rate cuts to combat a slower economy. That has been exacerbated by the latest inflation readings in the U.S. that show a return to their downtrend. Markets are now pricing in roughly three rate cuts by the end of 2025.

Looking further out on the yield curve

Bond yields moved higher in late 2024 as the soft landing narrative appeared more assured, inflation remained sticky, and investors anticipated a growing economy and less of a need to cut short-term rates. That fed the narrative of a higher neutral rate and thus a normal yield curve at a higher level.

It is worth noting that bonds have traded well within the rangebound environment that they have roughly been in since the end of the rate hiking cycle in 2023. Moreover, we anticipate the front end of the curve would be more likely to decline than the long end to normalize the curve. This is particularly the case in a soft landing environment with good growth in the economy.

If the economy does start to hit a rough patch, especially with the aggressive Trump policies and uncertainty they create, rates could be cut more aggressively and the long end should respond lower as well.

Meanwhile, the middle part of the yield curve could see some pull from normalizing front end rates. In particular, the lower duration of these bonds will see much less volatility in bond prices, even in an environment of rangebound trading where bond yields have moved back and forth easily by 100 basis points a few times even just in the past couple of years, while still ending up in the same place.                                                          

HPYM: The “happy medium” for your retirement portfolio

Harvest launched the Harvest Canadian T-Bill ETF (TBIL:TSX) and HPYM, rounding out its Fixed Income ETF suite in January 2024. This meant that it offered products that covered the major segments of the maturity spectrum; short, intermediate, and long duration fixed income vehicles.

In 2023, we highlighted the merits of the barbell bond strategy. Intermediate-term bonds offer only slightly lower returns than long-term bonds. Meanwhile, they also offer far less volatility than bonds that possess 20+ year durations. This makes the intermediate level of the maturity spectrum potentially appealing to investors who want the best of both worlds: high income and lower volatility.

The Harvest Premium Yield 7-10 Year Treasury ETF (HPYM:TSX) 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 US bonds with average maturities of 7-10 years.

This ETF aims to provide stability from its exposure to US Treasury bonds, which are guaranteed with the full faith and credit of the US government. And, like HPYT, HPYM employs our covered call strategy that increases yields and lowers volatility on its underlying holdings.

Investors who desire exposure to fixed income may want to consider HPYM as a “happy medium”. It covers the middle of the maturity spectrum, which means that its unitholders will ideally get the best of both worlds. HPYM can provide the stability and security that comes with the intermediate level of the maturity spectrum, while also delivering high monthly cash distributions with the level of covered call writing that Harvest will pursue.

HPYM has paid out a consistent monthly cash distribution of $0.08 per unit since inception.

Disclaimer:

For Information Purposes Only. All comments, opinions and views expressed are of a general nature and should not be considered as advice and/or a recommendation to purchase or sell the mentioned securities or used to engage in personal investment strategies.

Commissions, management fees and expenses all may be associated with investing in HARVEST Exchange Traded Funds managed by Harvest Portfolios Group Inc. (the “Funds” or a “Fund”). Please read the relevant prospectus before investing. The Funds’ returns are not guaranteed, their values change frequently, and past performance may not be repeated. Tax investment and all other decisions should be made with guidance from a qualified professional.

Distributions are paid to you in cash unless you request, pursuant to your participation in a distribution reinvestment plan, that they be reinvested into Class A and Class U units of the Fund. If a Fund earns less than the amounts distributed, the difference is a return of capital. Image by Freepik

Disclaimer

For Information Purposes Only. All comments, opinions and views expressed are of a general nature and should not be considered as advice and/or a recommendation to purchase or sell the mentioned securities or used to engage in personal investment strategies.

Commissions, management fees and expenses all may be associated with investing in Harvest Exchange Traded Funds, managed by Harvest Portfolios Group Inc. (the Fund(s)). Please read the relevant prospectus before investing. The indicated rates of return are the historical annual compounded total returns (except for figures of one year or less, which are simple total returns) including changes in unit value and reinvestment of all distributions and do not take into account sales, redemption, distribution or optional charges or income taxes payable by any securityholder that would have reduced returns. The funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are paid to you in cash unless you request, pursuant to your participation in a distribution reinvestment plan, that they be reinvested into Class A, Class B or Class U units of the Fund. If the Fund earns less than the amounts distributed, the difference is a return of capital. Tax, investment and all other decisions should be made with guidance from a qualified professional.

The current yield represents an annualized amount that is comprised of 12 unchanged monthly distributions (using the most recent month’s distribution figure multiplied by 12) as a percentage of the closing market price of the Fund. The current yield does not represent historical returns of the ETF but represents the distribution an investor would receive if the most recent distribution stayed the same going forward.

Certain statements in the Harvest Insights are forward looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend upon or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” “intend,” “plan,” “believe,” or “estimate,” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS.

FLS are not guarantees of future performance and are by their nature based on numerous assumptions, which include, amongst other things, that (i) the Fund can attract and maintain investors and have sufficient capital under management to effect their investment strategies, (ii) the investment strategies will produce the results intended by the portfolio managers, and (iii) the markets will react and perform in a manner consistent with the investment strategies. Although the FLS contained herein are based upon what the portfolio manager believe to be reasonable assumptions, the portfolio manager cannot assure that actual results will be consistent with these FLS.

Unless required by applicable law, Harvest Portfolios Group Inc. does not undertake, and specifically disclaim, any intention or obligation to update or revise any FLS, whether as a result of new information, future events or otherwise.