The Index strategy is based on qualitative and quantitative inputs including economic data and interpretations of government policy. Asset allocation guardrails include 50% – 200% allocation relative to the benchmark for credit, duration, and structure/mortgage weight. A high-conviction exposure to more speculative or diversifying positions is constrained to 0% – 20%.
The characteristics below reflect how we would best position a portfolio of fixed-income ETFs to achieve maximum total return over a comparable baseline neutral portfolio of fixed-income securities (benchmark).
Relative Positioning
Duration
Neutral Duration
Yield Curve
Neutral
Corporate Credit
Underweight
Securitized
Neutral MBS
Conviction
5% USD Bullish
Rationale
Neutral Duration
Last month, the Index moved from an underweight duration position to neutral. The Index remains duration neutral.
We have expected the 10-year yield to move to a range of 5.00% to 5.50%, but most of this move is complete.
No Curve Position
The Index holds no curve position relative to the benchmark.
90% Underweight Credit
In January, the Index took an underweight position in corporate bonds relative to our benchmark due to record corporate bond issuance and an overbought equity market.
Given similar conditions, the Index will maintain this position.
Neutral Securitized
Last month, the Index increased its allocation to MBS from 80% to 90%. Following a similar path, the Index has moved to a neutral position on MBS.
Falling volatility (in red, the MOVE Index) helps securitized assets perform better. Volatility is falling because the Federal Reserve’s expected rate cuts are disappearing. Given this, the bond market uncertainty index should fall.
However, as discussed above, if the economy stays strong and inflation surprises, uncertainty is expected to return to the bond market, making more than one rate cut difficult.
5% USD Bullish Conviction Allocation
Earlier this year, the Index added a 10% long U.S. dollar conviction position. This bet would benefit if the U.S. economy outperforms the rest of the world, leading to higher yields and a strong dollar.
Last month, the Index held a 10% conviction USD Bullish position. In June, the Index reduced this holding to 5% from 10% due to increased volatility surrounding the dollar.
Allocation Changes
| Name | June 2024 | May 2024 |
|---|---|---|
| iShares MBS ETF | 28.20 | 25.40 |
| iShares 3-7 Year Treasury Bond ETF | 17.00 | 16.36 |
| Schwab Short-Term U.S. Treasury ETF | 9.65 | 5.90 |
| Schwab Long-Term U.S. Treasury ETF | 8.50 | 9.10 |
| Vanguard Short-Term Corporate Bond ETF | 8.39 | 7.50 |
| Vanguard Long-Term Corporate Bond ETF | 7.30 | 7.40 |
| Vanguard Intermediate-Term Corporate Bond ETF | 6.10 | 6.84 |
| WisdomTree BBG USD Bullish Fund | 5.00 | 10.00 |
| iShares BBB Rated Corporate Bond ETF | 5.00 | 5.00 |
| iShares 7-10 Year Treasury Bond ETF | 4.86 | 6.35 |