On the surface, the recently released June reading of the Consumer Price Index (CPI) appears cut-and-dry as it relates to the Federal Reserve’s near-term plans for interest rates.
The CPI checked in at 3.5% last month, an improvement from the 4.2% year-over-year increase seen in May. With core inflation hovering around 2.9%, though, it’s likely not enough for the Fed to rush to cut rates. That reading has steadily ticked higher since March, and it may imply that the Fed’s next move could be to raise rates.
Currently, the prevailing wisdom is that the central bank will stand pat at its July meeting. However, there are many moving parts and perspectives as it relates to rates. Investors can skirt the drama while still accessing a tidy yield with the NEOS Enhanced Income 1-3 Month T-Bill ETF (CSHI).
Call on CSHI
The $1.45 billion CSHI isn’t the most glamorous bond ETF on the market, but to its credit, it certainly livens up the alternative to cash proposition. The NEOS ETF combines a portfolio of 1-3 month Treasury Bills — frequently used as cash alternatives — and S&P 500 Index options to produce a higher-yield alternative to money markets.
From a yield perspective, CSHI delivers the goods as highlighted by a 30-day SEC yield of 3.23% and a distribution rate of 4.71%. CSHI achieves those impressive percentages with minimal sensitivity to interest rate fluctuations, a potentially attractive attribute at a time when forecasting the Fed’s next move is a fool’s errand.
“Core inflation is the number the Fed tends to weigh most heavily, and it has been drifting higher for several months now,” noted deVere Group CEO Nigel Green. “This makes it harder for officials to justify an early pivot, even with a softer headline print. A hold, or even a hike, looks more probable than a cut from here.” However, he cautioned that, “nothing is guaranteed given how quickly the geopolitical backdrop is shifting.”
Some experts view the Fed as increasingly cautious, with a limited near-term likelihood of rate cuts. Those views support CSHI’s allure for investors.
“The labour market has stayed resilient and growth has held up reasonably well. Neither condition that would typically justify easing has clearly been met yet,” added Green. “Patience looks like the more defensible stance for now, with the door still open to further tightening if inflation proves stickier than hoped.”
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