Headline inflation came in hot for January, as did wholesale prices, leading to heightened interest rate concerns. A complex inflation and interest rate narrative creates the potential for ongoing volatility in markets. Investors looking to lower their rate risk in short duration bonds would do well to consider the Neuberger Berman Short Duration Income ETF (NBSD).

January’s headline and core inflation both came in higher than expected on Wednesday. Thursday also revealed hot wholesale prices, though core PPI came in at expectations. With many factors at play in 2025 markets, the inflation and interest rate narrative is proving to be one of complexity. The impact of current and potential tariffs and trade wars complicates the outlook for inflation this year. Add in geopolitical risks and turmoil at the federal level under the new administration, and this year continues to be difficult to predict.

Federal Reserve Chair Jerome Powell made clear in comments that the regulator is in no hurry to lower rates in the wake of January’s CPI print. Powell reiterated “we’re not quite there yet” regarding inflation, reported CNBC.

With the Fed solidly in a wait-and-see holding pattern, markets currently don’t anticipate a rate cut until September at the earliest. The CME FedWatch Tool puts a 42.9% likelihood of a quarter point rate cut in September and a 34.8% likelihood of holding steady at the current 4.25-4.5% range. The tool measures interest rate probabilities based on 30-day Fed Funds futures prices.

Dampen Interest Rate Risk With Short Duration Bonds

Short duration bonds may prove appealing in an environment of interest rate and inflation uncertainty. With lower rate risk than their longer duration peers, they offer investors a chance to diversify bond exposures while hedging for rate risk.

Within short duration bonds, the Neuberger Berman Short Duration Income ETF (NBSD) is worth consideration. The actively managed fund seeks to generate reliable income while providing an investment-grade, short-duration profile for portfolios.

NBSD currently offers a 30-day SEC yield of 5.49%, as of January 31, 2024. NBSD also offers a distribution rate of 5.71% over the same period. Distribution rate annualizes the most recent distribution and then divides by the most recent NAV. The weighted average duration of the fund was 1.88 years as of December 31, 2024.

See also: ETF of the Week: Neuberger Berman Short Duration Income ETF (NBSD)

The fund 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 both qualitative and 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 is comprised of 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.

The strategy also works to reduce credit risk through its diversified exposures.

NBSD carries an expense ratio of 0.35%.

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