As if the capital markets didn’t have enough to worry about with inflation and geopolitical tensions with Russia and Ukraine, yield curve inversions are adding an extra dose of anxiety.
“On Wednesday, the bond market watched with peril as the yield on the US 10-year Treasury bond briefly dipped below that of the two-year benchmark bond,” wrote Jonathan Shapiro in the Financial Review. “This was not long after the 30-year yield fell below the five-year yield for the first time since 2006.”
What’s the deal with inverted yield curves? When the benchmark short-term yield is higher than the 10-year yield, it could a forthcoming sign of a recession.
The fixed income investor has options to navigate this tricky market. One way is to get broad exposure or go short on duration.
Cushion Your Portfolio With Bonds
Often seen as an ideal safe haven asset, bonds can help cushion a portfolio that may be too heavy on equities should a downturn occur. Irrespective of whether a portfolio’s stock-bond split is 70-30, 60-40, or something else, investors can get broad-based bond exposure with the Vanguard Total Bond Market Index Fund ETF Shares (BND).
BND seeks the performance of the Bloomberg U.S. Aggregate Float Adjusted Index, which represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States, including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than one year.
As mentioned, bond investors can use BND as a traditional hedging component when the equities market goes awry. Short-term traders can also use the ETF, thanks to its dynamic ability to be bought and sold quickly in the open market due to its liquidity.
Shorten Duration
With short duration in focus, the Vanguard Short-Term Treasury ETF (VGSH) is a prime option to consider. This ETF offers exposure to short-term government bonds, focusing on Treasury bonds that mature in one to three years.
It can be an ideal option, given the uncertainty in the current market environment. Bonds can offer investors a safe haven against stock market volatility, while short-term bonds limit the risks of potential rate rises that can rob investors of fixed income opportunities.
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.
For more news, information, and strategy, visit the Fixed Income Channel.