Confidence in the bond markets is fueling a two-month rally in prices as the capital markets brace for rate cuts in 2024. Whether they happen at a furious pace or not is anyone’s guess, but the expectation of cuts are providing enough spark for the rally.
“A huge two-month rally in bond prices, powered by expectations that central banks will soon be cutting interest rates, has rescued fixed income markets from an almost unheard-of third straight year of declines,” reported Reuters.
The report also noted the decline in yield by the benchmark 10-year Treasury note is evidence of rising bond prices in the past two months. November and December saw the 10-year yield fall by almost 100 basis points as the Fed’s recent rate pauses are giving bullish bond investors optimism that rate cuts will happen in 2024.
The default play the last few years amid rising interest rates was to minimize rate risk and go short-term bonds. Now, with confidence returning in the bond markets, more investors could pivot and head long-term to seek more yield. That said, Vanguard has a few options to consider.
Play the Long Game
To stay in the confines of safe debt via Treasury notes, fixed income investors can consider the Vanguard Long-Term Treasury ETF (VGLT). The fund tracks the performance of a market-weighted Treasury index with a long-term dollar-weighted average maturity. It employs an indexing investment approach designed to track the performance of the Bloomberg U.S. Long Treasury Bond Index. That index includes fixed income securities issued by the U.S. Treasury (not including inflation-protected bonds) with maturities greater than 10 years.
For more yield, albeit higher credit risk, investors can opt for corporate bonds via the Vanguard Long-Term Corporate Bond ETF (VCLT). The ETF tracks the performance of the Bloomberg U.S. 10+ 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 greater than 10 years.
For an all-inclusive option that diversifies bond exposure with a mix of government and corporate debt, investors can consider the Vanguard Long-Term Bond ETF (BLV). It seeks to track the performance of the Bloomberg U.S. Long Government/Credit Float Adjusted Index, which includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds with maturities of greater than 10 years and are publicly issued.
For more news, information, and strategy, visit the Fixed Income Channel.