Safe ETFs Win On Fed Minutes

There was no spark in the latest Fed minutes. Fed officials continued to indicate that they are ready to raise rates again despite ongoing worries over subdued inflation. At the current level, the Fed predicts one more rate hike this year and three more in the next (read: Fed to Hike in December? Buy Quality ETFs).

But what was striking in minutes was Fed chair Yeller’s comment over inflation. In her one of her last policy meetings she was “very uncertain” about inflation and believes that prices could remain subdued for years to come. PowerShares DB US Dollar Bullish ETF UUP nosedived after such comments and lost about 0.8% on Nov 22.

Following the minutes, Interest rate futures traders priced in about 92% probability of a December rate hike, according to the CME Group’s FedWatch Tool. But the likely move seems to have been baked in already at the current level as the yield on 10-year U.S. Treasury yield dropped 4 bps to 2.32% on Nov 22, from 2.36% recorded the day earlier.

The yield spread between two-year notes and 10-year notes held near 10-year lows at 58.5 basis points on Nov 22. The flattening in the Treasury yield curve stemmed from concerns about long-term growth and inflation despite normalization of the central bank’s monetary policy.

So, along with many other analysts, we too believe that the Fed monetary policy tightening is not on par with the muted inflation levels. The economy may be on the mend as evident from the decent manufacturing labor market and housing data, but “the PCE core at levels that are as low as they’ve been in a couple of years, means that the yield curve should flatten,” as per an analyst.

ETF Winners

Below we highlight a few ETF winners post minutes.

Gold

The safe-haven precious metal gold gained as the dollar dipped. Notably, the price of gold shares an inverse relationship with the U.S. dollar. Gold bullion ETF SPDR Gold Shares GLD also added about 0.9% gains. Gold’s gains indicate that investors are apprehensive of long-term economic growth. Chances of slower Fed rate hikes next year could also be behind investors’ renewed interest in gold investing.

Long-Term U.S. Treasury

U.S. sovereign bond prices recorded gains on Fed minutes while the yield on the 10-year U.S. Treasury note slipped. iShares 20+ Year Treasury Bond TLT gained about 0.3% while leveraged long-term Treasury ETF Direxion Daily 20+ Year Treasury Bull 3X ETF TMF added about 1.1%.

Yen

Since a shift toward safe investments were rife after Fed minutes, safe currency ETF CurrencyShares Japanese Yen Trust FXY added more than 1.1% on Nov 22 (read: Safe Haven ETFs Gain Amid Geopolitical Threats).

Dividend-Growth Stocks

Stocks and funds that have consistently increased dividend every year for a long period of time are considered safe investments. These generally act as a hedge against economic uncertainty and provide protection by offering sizable payouts on a regular basis. SPDR S&P Dividend ETF SDY is such a fund that gained about 0.1% on Nov 22 and yields about 2.40% annually (read: What Makes iShares' Dividend and Buyback ETF Launch Timely?).

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ISHARS-20+YTB (TLT): ETF Research Reports
 
CRYSHS-JAP YEN (FXY): ETF Research Reports
 
GOLD (LONDON P (GLD): ETF Research Reports
 
PWRSH-DB US$ BU (UUP): ETF Research Reports
 
SPDR-SP DIV ETF (SDY): ETF Research Reports
 
DIR-D 20Y+T BL3 (TMF): ETF Research Reports
 
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