Rthe rise in interest rates is penalizing for bonds with longer maturities. Add to that fixed-income investors’ fears of inverting the yield curve, and it’s no surprise that many market participants are turning to short-term rates.
This includes exchange-traded funds like the Franklin Liberty Short Term U.S. Government ETF (FTSD). The $324.58 million FTSD lives up to its billing as a low-duration product. Its average duration is 1.15 years, well below the 1.89 years found on the benchmark, which is the Bloomberg US Government Index.
FTSD’s status as a short-term, actively managed product is also important at a time when bond market participants are increasingly concerned about yield curve inversion – the scenario in which short-term bonds term offer higher yields than their long-term counterparts with comparable credit risk.
“The yield curve, which plots the yield of all Treasury securities, generally slopes upward as the payout increases with duration. Yields move inversely to prices. Reuters reported. “A steepening curve generally signals expectations of stronger economic activity, higher inflation, and higher interest rates. A flattening curve may mean that investors are expecting higher short-term rates and are pessimistic about economic growth.
Bond market participants view yield curve inversion as a reliable predictor of economic contraction, which makes FTSD’s status as an active fund with minimal credit risk all the more relevant in the climate of current market. In a 2018 study, the San Francisco branch of the Federal Reserve noted that since 1955, there have been six instances of yield curve inversion, each preceding a recession within six months to two years. More recently, there was a yield curve inversion in 2019, before the onset of the coronavirus economic crisis in 2020.
Plus, in these tough times for bond investors, it pays to put depth and experience to work. As an actively managed ETF, FTSD ticks those boxes.
The fund “invests across the full universe of US government bonds, actively managing duration positioning, sector allocation and security selection.” noted Franklin Templeton. “Managed by an experienced investment team that has been investing in US government bonds since 1947 (and) seeks a high level of current income consistent with prudent investing, while seeking preservation of capital.”
FTSD has a weighted average maturity of 4.65 years. The fund holds 392 bonds, of which almost 61% are mortgage-backed securities (MBS). Short-term Treasury bills make up 38% of the fund’s slate, according to issuer data.
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