It was going to happen at some point, but central banks are now ready to unload bonds back into the market. Stimulus measures are scaling back amid improving economies on the path to recovery from the pandemic.
The U.S. Federal Reserve and the Bank of England will soon be reducing their bond holdings, which will only make the bond markets an even trickier market to navigate amid rising rates due to rampant inflation.
“Central bank balance sheets will shrink in aggregate in size for the first time in history,” said Ralf Preusser, global head of rates research at Bank of America. “Some central banks may also experiment with [actively selling bonds], where we also have no experience.”
In the meantime, investors can brace themselves for a deluge of bonds back into the debt markets. They can opt for safe haven U.S. Treasury notes, for which Vanguard has three options with varying duration.
3 Ways to Get Treasury Exposure
To mitigate rate risk, investors can try the Vanguard Short-Term Treasury ETF (VGSH). This ETF offers exposure to short-term government bonds, focusing on Treasury bonds that mature in one to three years.
Investors willing to step further out on the yield curve can look to getting exposure to bonds with intermediate- and long-term maturities. One option is the Vanguard Intermediate-Term Treasury Index Fund ETF Shares (VGIT) and another is the Vanguard Long-Term Treasury Index Fund ETF Shares (VGLT).
VGIT seeks to track the performance of a market-weighted Treasury index with an intermediate-term dollar-weighted average maturity. The fund employs an indexing investment approach designed to track the performance of the Bloomberg U.S. Treasury 3-10 Year Bond Index that includes fixed income securities issued by the U.S. Treasury (not including inflation-protected bonds) with maturities between three and 10 years.
VGLT 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, which includes fixed income securities issued by the U.S. Treasury (not including inflation-protected bonds) with maturities greater than 10 years.
For more news, information, and strategy, visit the Fixed Income Channel.