The Federal Reserve’s latest rate hike of 25 basis points shows that its fight against inflation isn’t over, but we may be getting closer to the end of the rate hike cycle. But with inflation still high and the U.S. central bank continuing to raise interest rates, combined with the recent banking crisis triggered by the sudden collapse of Silicon Valley Bank, we may still have considerable market volatility in the months ahead of us.
“There was a market sentiment earlier this year that we would have a soft landing or perhaps no slowdown at all, encouraging more risk-taking,” said Sara Devereux, global head of Vanguard Fixed Income Group. “We did not fall for that narrative and kept our conviction that a recession was still a very real possibility.”
Devereux added: “We’re not saying that a recession will happen. But we’re prepared to weather any storm.”
See more: “Once Again, Bond ETFs Provide Diversification Benefits”
A Defensive Approach to Fixed Income
For investors who previously steered clear of fixed income assets because of their historically poor performance in 2022, now may be a good time to consider adding bonds to portfolios. Yields are up, raising expected returns going forward. Plus, bonds tend to rally during a recession, which is what Vanguard is currently forecasting.
When investing in fixed income, Vanguard recommends a defensive approach, focusing on high-quality fixed income. Vanguard has an array of fixed income ETFs that seek high-quality bonds, including the Vanguard Short-Term Bond ETF (BSV), the Vanguard Ultra-Short Bond ETF (VUSB), the Vanguard Short-Term Treasury ETF (VGSH), and the Vanguard Short-Term Corporate Bond ETF (VCSH).
BSV invests in U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds with a dollar-weighted average maturity of one to five years.
VUSB, meanwhile, invests in a diversified portfolio of high-quality and, to a lesser extent, medium-quality fixed income securities. The fund is expected to maintain a dollar-weighted average maturity of zero to two years.
VGSH offers exposure to short-term government bonds, focusing on high-quality U.S. Treasury bonds that mature in one to three years. Given that uncertainty in the current market environment remains, this can be an ideal option for risk-off fixed income investors. 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.
VCSH seeks to track the performance of a market-weighted corporate bond index with a short-term dollar-weighted average maturity. The fund employs an indexing investment approach designed to follow the performance of the Bloomberg U.S. 1-5 Year Corporate Bond Index.
For more news, information, and analysis, visit the Fixed Income Channel.