USFR - USFR: With The Market In Turmoil Floating Rate Treasuries Deliver
2024-04-12 00:16:34 ET
Summary
- USFR invests in floating-rate treasuries with yields that adjust to Fed Funds, offering a high yield (around 5.36%) in this environment.
- The market is pricing out rate cuts for the year, increasing the probability for easing in September only given the strong March CPI data.
- Unlike risky futures bets, USFR offers a safe way to benefit from no rate cuts in 2024.
- Holding cash through USFR can be a good hedge against market volatility, especially considering the decay in option premiums when purchasing puts.
Thesis
On April 10 the March 2024 CPI data was released, numbers which came in higher than expected, triggering a red day in equities and a massive rally in bond yields. Sticky inflation has been a problem for the Fed, who might be forced down the line to make 3% the new long term inflation target. For now however, the market is starting to price out cuts for the year, with the odds for a June 2024 cut significantly lower:
CME Fed Tool (CME)