Fixed income investors are dealing with more bumps on Bond Road this year than they bargained for. Treasury yields remain elevated, and prevailing market wisdom continues to hold that persistent inflation will keep the Federal Reserve from lowering interest rates.

While the disappointing July jobs report may have altered the rate cut outlook, forecasting the Fed’s next move is increasingly difficult. Especially as Fed Chair Kevin Warsh keeps dampening down on the chatter from which investors can make inferences.

“He has emphasized two changes for his tenure. First, that inflation is too high and needs to come down,” noted Andrew Sheets, global head of fixed income research at Morgan Stanley. “And second, that the Fed has historically communicated too much with the market, which Chair Warsh thinks has helped contribute to investors potentially taking too much risk while also restricting the Fed’s options to act.”

However, bond investors can survive and thrive amid this uncertainty with actively managed strategies like the ALPS/SMITH Core Plus Bond ETF (SMTH). The $3 billion actively managed ETF turns three years old in December and is especially appealing to end users as a dynamic, responsive strategy to navigate market volatility without relying on Fed guesswork.

SMTH for the Bond Market Win

The simple truth is that the Fed under Warsh is clamping down on the clues or “Fed speak” that bond markets hung on under previous regimes. That could very well place a premium on the responsiveness of active management relative to passive bond funds.

“In the face of that, one option for the Fed to combat this inflation would have been to raise interest rates. It didn’t do that. Another would be to suggest that it was very close to taking action and likely to move soon. It didn’t do that either,” added Sheets.

Another reason that active aggregate bond strategies, like SMTH, could be gaining appeal going forward is because the Fed is increasingly divided. As the recent meeting minutes highlight, several Fed governors believe rates hike should be raised to quash inflation.

“Sternly staring at inflation until it melts before our withering gaze is not an option,” said Fed member Christopher Waller.

How deep the Fed divide runs remains to be seen, but it implies that preparation and protection will benefit bond investors heading into the end of 2026. SMTH, which yields 4.41%, checks those boxes.

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