After mitigating rate risk in the last few years, it might be time for fixed income investors to reach further out on the yield curve. They can do that with long-term bond ETFs. Additionally, the capital markets are anticipating rate cuts this year. Meaning it may be best to lock in on higher yields by adding more duration.
Short-term bond funds were in high demand as the Fed was raising interest rates to tamp down inflation. The timing could be right to make a pivot into debt holdings with longer durations. That is if the Fed loosens monetary policy as expected.
“After starting the year recommending that investors focus on the middle of the yield curve, we began to advise investors to lengthen their duration in our midyear bond market update,” said Morningstar, citing bond opportunities in 2024. “According to our forecasts, we continue to think investors will be best served in longer-duration bonds and locking in the currently high interest rates.”
“At the short end of the curve, we expect that the Fed will shift course and begin to ease monetary policy in 2024 by lowering the federal funds rate,” Morningstar added. “This forecast is based on the combination of our projections that inflation will continue to moderate and that the rate of economic growth will slow.”
3 Options to Go Long
Vanguard offers three options for long-term debt. One is the Vanguard Long-Term Treasury ETF (VGLT), which tracks the performance of a market-weighted Treasury index with a long-term dollar-weighted average maturity. VGLT 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 added 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. It 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 the aforementioned 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. It 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 analysis, visit the Fixed Income Channel.