The bond markets could be getting more predictable in coming months after the U.S. Federal Reserve reiterated that rate cuts will come after it opted to keep rates unchanged in its latest meeting. That should help ease volatility in the bond markets, making it ideal for prospective bond investors to get core exposure.
“Price swings in fixed-income markets that sent implied volatility to the highest since 2008 are finally subsiding as the global interest-rate easing cycle kicks in, according to Goldman Sachs Group Inc,” a Bloomberg report said, noting that historical data revealed that volatility will fall in the next 12 to 24 months on the anticipation of interest rate cuts.
With the expectation that yields will fall in tandem with interest rate cuts, investors may want to get core exposure to bonds for the price appreciation that could be forthcoming. That said, consider using the Vanguard Total Bond Market Index Fund ETF Shares (BND) to complement equities exposure.
Per BND’s baseline fund description, it seeks to track the performance of the Bloomberg U.S. Aggregate Float Adjusted Index. The fund incorporates a broad spectrum of debt holdings, giving investors additional diversification within their core bond portfolio. The index represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States. These include government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than one year.
An Active Option
Investors who want more flexibility beyond a passive index should look at the Vanguard Core Bond ETF (VCRB), which comes with a low 0.10% expense ratio. Active management helps maintain pliability, especially with a data-dependent Federal Reserve and interest rate policy moving markets as of late. Even though volatility gives way to more predictability, active management gives peace of mind in the event of any market shocks. That said, holdings come under the auspices of experienced portfolio managers with the Vanguard Fixed Income Group.
Just like BND, VCRB mitigates credit risk via diversified exposure to the U.S. investment-grade bond market. That doesn’t mean sticking strictly within the safe confines of U.S. Treasuries. Much like the diversification features of BND, the actively managed VCRB extends its exposure to other fixed income assets. Those include mortgage-backed securities and corporate securities. Again, with the active exposure that VCRB offers, investors are able to harness the inherent portfolio management capabilities.
For more news, information, and analysis, visit the Fixed Income Channel.