Stubborn inflation could keep the benchmark 10-year Treasury yield elevated, if ING market strategist Padhraic Garvey is correct. For yield seekers in Treasury bonds, this is good news, but maybe not so for those hoping for price appreciation.
Garvey’s prediction of 10-year Treasury yields around 5.5% by the end of the new year is much higher than the 4.12% of forecasts compiled by Bloomberg. There were 51 forecasts, with most expecting that yields will be lower than the current levels, though Garvey’s prediction may not be surprising given his bearish bonds proclivity.
However, Garvey’s prediction could prove correct, given that inflation has been sticky and stubborn. The U.S. Federal Reserve has been cutting rates, but persistent inflation could change the monetary policy easing narrative and slow rate cuts. Garvey also noted that the incoming presidential administration could implement tariff and tax-cut policies that could cause price pressures, keeping the Fed restrictive. Also, the growing federal deficit could be another factor.
“We have this inflation narrative which is still north of 2.5%, we have this deficit narrative,” said Garvey, ING head of global debt and rates strategy. “We are quietly confident we’ll see a 5% handle.”
As mentioned, higher yields will keep fixed income investors happy, especially those who want to concentrate their exposure on Treasury bonds. With that, Vanguard has a few ETFs to consider for exposure.
First is the Vanguard Intermediate-Term Treasury Index Fund ETF Shares (VGIT), which tracks the performance of the Bloomberg U.S. Treasury 3-10 Year Bond Index. This index includes fixed income securities issued by the U.S. Treasury (excluding inflation-protected bonds) with maturities between three and 10 years.
A Long and Short Option
Fixed income investors looking to step further out on the yield curve should look at the Vanguard Long-Term Treasury Index Fund ETF Shares (VGLT). It seeks to track the performance of a market-weighted Treasury index with a long-term dollar-weighted average maturity. The fund employs an indexing investment approach designed to track the performance of the Bloomberg U.S. Long Treasury Bond Index. It includes fixed income securities issued by the U.S. Treasury (excluding inflation-protected bonds) with maturities greater than 10 years.
Short-term bond funds can be a place for investors to temporarily park cash, while attaining more competitive yields versus money market accounts. That said, consider the Vanguard Short-Term Treasury ETF (VGSH). The fund offers exposure to short-term Treasury notes with maturity dates that fall within one to three years.
For more news, information, and strategy, visit the Fixed Income Channel.