Ahead of the Federal Open Market Committee (FOMC) meeting that starts on Tuesday, September 15, bond markets were already on edge as rate hike expectations soared. It doesn’t help matters that, earlier in the summer, 30-year Treasury yields hit their highest levels in 19 years.
On Monday, 10-year Treasury yields reached 5%, albeit briefly, for the first time since 2023, unnerving some already skittish fixed income investors. Nervous fixed income investors may be able to find some comfort with ETFs such as the (BNDI ). The $191.2 million BNDI is an options income-based spin on old guard aggregate bond ETFs, which are usually heavily allocated to intermediate-term and long-dated Treasuries.
BNDI holds two of the largest basic aggregate bond ETFs, employing “a data-driven put option strategy.” That implies that it could be one of the few fixed income ETFs right for these times. While not a full guarantee against bond market downside, BNDI offers some cushion in the form of a 30-day SEC yield of 3.53%. Plus, with yields high today, risk-tolerant long-term investors could benefit from considering the NEOS fund.
Obviously, bond prices and yields move inversely of each other, so investors aren’t off base when expressing concern about the state of the bond market. However, history indicates that the market can reward participants for buying bonds during times of elevated yield, potentially bolstering the case for BNDI.
“A wide range of factors are pushing up yields, including investor anxiety about ballooning government debt, a massive surge in corporate borrowing to fund artificial intelligence projects, and the threat of higher inflation stemming from the Iran War’s impact on oil prices,” observed Morningstar’s Sarah Hansen. “Their impact is most pronounced on longer-term bonds, which tend to be more sensitive to changes in interest rates and inflation expectations.”
Though they didn’t explicitly mention BNDI, some active bond managers recently made compelling points that augur well for the NEOS ETF. They believe that today’s high yields imply value in fixed income. Alone, that could be a point in favor of this ETF.
Second, some experts believe that today’s yields are currently elevated enough to provide investors with legitimate inflation protection. That’s something to consider, when government spending is eroding purchasing power and the Fed signals it would raise rates solely to ward off inflation.
Finally, some fixed income experts believe the long-term case for bonds isn’t about generating returns in excess of those offered by stocks. Rather, that case centers around income generation and downside protection. It’s possible that BNDI will check those boxes over the long haul.
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