Hedge in NBSD as Markets Weigh Economic Worries

Tariff uncertainty and job market weakening added new layers of complexity to early September markets. August’s significant miss on the jobs report sent investors piling into Treasuries, betting big on a Fed interest rate cut later this month. While longer duration bonds will benefit from interest rate cuts, maintaining defensive short-duration positions may help to diversify portfolios.

Treasury yields fell sharply on Friday as investors flooded into bonds on the tail of August’s weak jobs report. 2-year Treasury yields fell to a three-year low, plummeting 12 basis points, while 10-year yields dropped 14 basis points, reported WSJ. Job market resilience was one of the key factors that allowed the Federal Reserve to maintain interest rates while inflationary pressures and uncertainty threatened. Now, investors are betting big that the regulatory body will cut rates by at least a quarter point this fall.

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While interest rate cuts could prove beneficial across a number of fronts, resuming rate cuts due to economic weakening reflects the complex path ahead. The August jobs report revised June’s nonfarm payrolls down by 27,000 — from 14,000 originally to -13,000. It’s the first net job loss since December 2020.  And job creation in August totaled just 22,000 on expectations of 75,000.

Tariffs remain the great wild card of 2025, with new developments leading to greater uncertainty in the near-term. Recent rulings by a U.S. appeals court found the majority of new tariffs this year illegal. The administration is escalating the issue to the Supreme Court.

Should the ruling stand, it could have significant impacts on markets and bonds, as the U.S. would be forced to pay back money collected. Add in fresh concerns over central bank autonomy, and the potential for volatility in U.S. bond markets remains notable. It makes lower risk short-duration bonds an attractive diversifier in portfolios.

The actively managed Neuberger Berman Short Duration Income ETF (NBSD) seeks to generate reliable income while providing an investment-grade, short duration profile for portfolios. Short-term bonds often prove appealing for their reduced rate risk in challenging environments. In addition, investment-grade bonds generally carry a low credit risk. Combining the two creates reliable income potential for portfolios when market volatility and uncertainty rise.

NBSD invests across a variety of sectors and bond types, including fixed- and floating-rate investment-grade bonds, both foreign and domestic. These can include asset- and mortgage-backed securities, collateralized debt obligations (including CLOs), and credit risk transfer securities.

The management team considers qualitative as well as quantitative factors when selecting securities. They search for underpriced bonds, both on a sector level as well as within peer groups. While 80% of the fund comprises investment-grade bonds, up to 20% may be below investment-grade. When investing in these junk bonds, the fund managers seek issuers in relatively strong financial health and whose credit scores may increase.

NBSD carries an expense ratio of 0.35%.

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