The Federal Reserve has sought to assure skittish investors that interest rates will remain low for the foreseeable future.
Last month in her congressional testimony, Fed Chair Janet Yellen said, “Even with the recent declines, the unemployment rate remains above Federal Open Market Committee participants’ estimates of its longer-run normal level.” July’s jobs number of 209,000 was well below estimates calling for 233,000 added jobs and the U.S. unemployment rate unexpectedly nudged higher, giving investors reason to believe Yellen will not be in a hurry to boost rates.
“Yellen’s testimony, combined with elevated tensions in Eastern Europe and Middle East that we believe caused a recent flight to the quality, via U.S. Treasuries, contributed to the yield on the 10-year government bond falling further in 2014 from just above 3% to below 2.5%. However, Yellen’s views also served as a reminder that rates will ultimately move higher,” said S&P Capital IQ in a new research note.
Higher rates punish longer-term bonds and the exchange traded funds that hold those bonds. However, investors have plenty of fixed income ETF options even in a rising rate environment, including the Vanguard Short-Term Bond ETF (NYSEArca: BSV).
BSV is S&P Capital IQ’s focus ETF of the month for August. The research firm rates the ETF, which tracks the Barclays Capital 1-5 Year Government/Credit Index, overweight. [Considering Short-Term Bond ETFs]
“Two-thirds of the ETF’s holdings are tied the U.S Government (Treasuries and Agencies such as Fannie Mae) and thus have strong credit quality. The remainder of the bonds are mostly in U.S. and international corporate bonds, mostly rated A or BBB by rating agencies that operate independently from S&P Capital IQ. The modest duration and relatively elevated credit quality of the holdings helps contribute to the positively low risk considerations seen by S&P Capital,” said S&P Capital IQ in the note.