Rate cuts create a fairly predictable sequence of events in fixed income markets. When the Fed cuts rates, existing fixed-rate bonds become more attractive compared to newly issued bonds with lower rates. The key variable is duration - how sensitive a bond is to interest rate changes. Longer-duration bonds typically see bigger price moves during rate-cutting cycles because their future payments become more valuable in a lower-rate environment.
Past Fed easing cycles show some consistent trends. The 30-year Treasury has performed well during rate cut cycles regardless of whether a recession followed. The ATAC Credit Rotation ETF (JOJO) is designed to capitalize on exactly these kinds of dynamics. Its tactical rotation strategy can adapt to changing credit conditions, potentially capturing bond price movements that occur both before and after Fed rate cuts begin.
Short-term vs long-term bond behavior after rate cuts
Bond durations tell different stories when the Fed starts cutting, and understanding these patterns matters for positioning right now.
6-month and 12-month Treasury bill trends
Short-duration Treasury instruments move fast once rate cuts begin. Historical data shows 6-month Treasury bills consistently decline after the first rate cut, rarely rising above their pre-cut levels. The median 6-month T-Bill yield generally falls about 0.75% within six months of the initial cut. For 12-month T-Bills, the decline is usually more pronounced, averaging around 1%.
The trade-off here is clear - short-term instruments react quickly but offer limited price appreciation due to their shorter duration. They follow the Fed funds rate pretty closely.
2-year and 5-year Treasury yield patterns
Medium-term Treasuries show more dramatic movements. The 2-year Treasury yield typically declines by 0.50% within 60 days after the initial Fed cut, stabilizes temporarily, then resumes its decline toward a full 1% reduction within six months. The 5-year Treasury yield usually decreases by 1% heading into the first cut and then moves lower by another 0.50% within two months.
Medium-term bonds combine reasonable yield with meaningful duration, which often makes them attractive throughout rate-cutting cycles. They get you more price appreciation than the short end while still being somewhat responsive to Fed policy.
10-year and 30-year bond performance post-cuts
Long-term bonds usually deliver the strongest total returns despite sometimes seeing less yield movement. The 10-year Treasury yield commonly drops about 1% prior to the first Fed cut, then remains range-bound for roughly 30 days before continuing its decline. The 30-year Treasury typically sees a more modest 0.5% decline heading into the first cut, followed by a range-bound period before resuming its downward trajectory.
Duration drives the story here. The ICE BofA Current 10-Year US Treasury Index outperformed the 2-Year Index in all examined periods during previous easing cycles – with average outperformance exceeding 6%. Longer-duration bonds lock in higher yields over time, which creates superior return profiles when rates are declining. The further out you go on the curve, the more sensitive your bond becomes to rate changes.
Why JOJO ETF is positioned for a bond bull market
With the Fed getting ready to cut rates, tactical bond strategies like JOJO present some interesting opportunities for investors looking to play the potential bond bull market.
How the ATAC Credit Rotation ETF (JOJO) works
JOJO operates through a pretty straightforward approach - it rotates between high yield debt (risk-on) and Treasuries (risk-off) based on a proprietary signal. The signal evaluates how utilities perform relative to the broad stock market as a risk trigger. When utilities outperform, it suggests investors are moving toward safety, which often precedes credit stress.
Why JOJO benefits from falling interest rates
Unlike traditional bond funds that just sit there, JOJO can tactically position itself ahead of credit spread movements. With rates expected to drop, JOJO's ability to rotate into Treasuries could work out pretty well as longer duration bond prices rise.
JOJO's strategy hinges on utilities being the most bond-like sector in the market. The fund evaluates conditions weekly, going offensive with high yield bond ETFs when utilities outperform the broad market, and defensive with Treasuries when utilities underperform. The approach tries to anticipate credit spread widening before it happens.
The weekly evaluation makes sense - credit conditions can shift pretty quickly, and having that flexibility could be valuable when the environment changes.
Comparing JOJO to traditional bond funds
Unlike passive bond funds, JOJO:
· Actively rotates holdings weekly based on market signals
· Maintains a high portfolio turnover rate
· Fits specifically in the fixed income portion of asset allocations
· Aims to decrease credit risk exposure ahead of market stress
The high turnover rate is worth noting - it suggests the fund is actually making frequent tactical shifts rather than just holding positions. That could work in its favor during volatile periods.
Conclusion
The patterns here are pretty clear - we're looking at what could be a significant opportunity for bond investors. The historical relationship between Fed policy shifts and bond performance has been consistent across different economic environments, and the current setup appears to be falling into place.
JOJO offers something different from traditional bond funds. Its tactical rotation approach means it can position itself ahead of credit spread movements rather than just reacting to them. The fund uses utilities sector performance as a risk signal, which gives it the ability to shift between high yield debt and Treasuries based on market conditions. That kind of flexibility could be valuable in the environment we're heading into.
I think the key question is whether the Fed follows through on the rate cuts that are currently priced into the market. If they do, and if the historical patterns hold, bond investors should see some solid opportunities. The tactical nature of JOJO's strategy means it's positioned to potentially capture upside in both the anticipation phase and the actual cutting cycle.
The bond bull market case seems pretty compelling right now. Treasury yields have room to fall, the Fed appears ready to ease, and tactical funds like JOJO can adapt to changing conditions. For investors looking to position in fixed income, this could be one of those periods where the stars align for the asset class.
Overall, I think it comes down to whether you believe the Fed will deliver on rate cuts and whether you want exposure to a strategy that can rotate tactically. The setup looks favorable.
Consider JOJO as part of your bond allocation strategy. Not because I developed the strategy and I’m the portfolio manager of the fund. Consider it because there are no gurus, only cycles. And the cycle may finally be here for it.
Michael A. Gayed, CFA
Junk debt, also known as high-yield bonds or speculative-grade debt, refers to fixed-income securities issued by companies or governments with lower credit ratings, offering higher interest rates to compensate investors for the elevated risk of default.
Duration is a measure of a bond's price sensitivity to interest rate changes, expressed in years, that accounts for the timing of all cash flows and serves as a more accurate risk metric than simple maturity.
The VIX index, often called the "fear gauge" of Wall Street, is a real-time market index that measures the market's expectation of 30-day forward-looking volatility derived from S&P 500 index options prices, serving as a key barometer of investor sentiment and market risk.
The ICE BofA BB US High Yield Index Option-Adjusted Spread measures the yield differential between BB-rated corporate bonds and a spot Treasury curve, quantifying the risk premium for below-investment-grade debt with a BB rating in the US market.
As with all ETFs, Fund shares may be bought and sold in the secondary market at market prices. The market price normally should approximate the Fund’s net asset value per share (NAV), but the market price sometimes may be higher or lower than the NAV. The Fund is new with a limited operating history. There are a limited number of financial institutions authorized to buy and sell shares directly with the Fund, and there may be a limited number of other liquidity providers in the marketplace. There is no assurance that Fund shares will trade at any volume, or at all, on any stock exchange. Low trading activity may result in shares trading at a material discount to NAV.
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