The U.S. Federal Reserve looks primed and ready to continue raising interest rates until the economy spins off into a recession. That’s giving traders more fodder to push for moves that play off this bearish tone.
“For all the volatility whipsawing the US bond market, traders are showing increasing confidence that the alarm bells warning of a recession will only get louder,” a Bloomberg report noted.
The trend of rising inflation continued to persist as June consumer prices jumped to a four-decade high. Some analysts see rates getting a full percentage point hike as the Fed tightening continues.
“The Fed really has missed the ball on inflation and letting it get entrenched, so 100 basis points is definitely on the table,” said John Luke Tyner, portfolio manager at Aptus Capital Advisors, which oversees $2 billion in assets. “The yield curve is probably telling us something serious now.”
“As we continue to not see a peak inflation number, the sentiment and the expectations for future inflation just gets stronger and strong on the consumer side,” said Aptus Capital’s Tyner. “Powell will want to make sure that the message is known that he is taking this seriously. He’s made that clear over the last few months as he’s been more aggressive than expected, but I think that will continue.”
Short-Term Bond Exposure
As the expectation of rising interest rates continues, one way to mitigate credit risk is by shortening duration. As such, fixed income investors should consider the Vanguard Short-Term Bond Index Fund ETF Shares (BSV).
The fund seeks to track the performance of the Bloomberg U.S. 1–5 Year Government/Credit Float Adjusted Index, which includes a diverse array of bond exposures, including all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities between one and five years and are publicly issued.
Highlights of BSV:
- Seeks to track the performance of the Bloomberg U.S. 1–5 Year Government/Credit Float Adjusted Index, a market-weighted bond index that covers investment-grade bonds with a dollar-weighted average maturity of one to five years.
- Invests in U.S. government, high-quality (investment-grade) corporate and investment-grade international dollar-denominated bonds.
- Follows a passively managed, index sampling approach.
- Has a low expense ratio of 0.05%.
For more news, information, and strategy, visit the Fixed Income Channel.