Rising interest rates and fears of a recession keep pushing yields higher in the short term. Thus, this is making short duration an attractive option, particularly for investors seeking yield in the current fixed income environment.
Investors got a chance to digest the latest commentary by the U.S. Federal Reserve after it raised interest rates by another 75 basis points. As such, yields climbed higher to start the week’s trading session as the Fed looked to continue its hawkishness in order to keep wrangling inflation and stop it from getting out of control.
“Yields soared on Monday as markets digested the Federal Reserve’s interest rate hikes and absorbed economic commentary from Fed speakers,” a CNBC report noted. “The benchmark 10-year Treasury hit 3.902% near session highs, reaching its highest point since April 2010.”
For investors who are long on bond prices, this might not sound like welcome news, but for yield-hungry investors, it’s an opportune time to pick up short-duration debt. As such, the Vanguard Short-Term Treasury ETF (VGSH) is one fund that’s worth considering. This ETF offers exposure to short-term government bonds, focusing on Treasury bonds that mature in one to three years.
The shorter duration means sensitivity to interest rates will be higher. With the shorter end of the yield curve pushing higher as of late, VGSH allows investors to take advantage of the yield now before the Fed hits its target inflation rate.
Overall, VGSH:
- Seeks to provide current income with modest price fluctuation.
- Invests primarily in high quality (investment-grade) U.S. Treasury bonds.
- Maintains a dollar-weighted average maturity of one to three years.
More Yield, But More Risk
For a little more yield with the idea of accepting more risk, corporate bonds are an ideal opportunity. However, it doesn’t always have to be a risk affair with funds like the Vanguard Short-Term Corporate Bond ETF (VCSH).
The fund gives fixed income investors that added punch with respect to yield, but also focuses on investment-grade debt, thereby limiting bond holdings to mostly debt that falls within the A and BBB ratings. While corporate debt may not be as safe as government debt, VCSH still gives investors some peace of mind with this investment-grade focus.
VCSH seeks to track the performance of a market-weighted corporate bond index with a short-term dollar-weighted average maturity. The fund employs an indexing investment approach designed to track the performance of the Bloomberg U.S. 1-5 Year Corporate Bond Index.
This index includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities between one and five years. VCSH also comes with a low 0.04% expense ratio.
For more news, information, and strategy, visit the Fixed Income Channel.