Consider Short-Term Corporate Bonds Before Rate Cuts

While the capital markets are expecting rate cuts to happen in 2024, there’s no telling when the Federal Reserve will actually loosen monetary policy. That said, it may be time to take advantage of yield in short-term corporate bonds while they last.

Last year, both equities and bonds felt the wrath of high interest rates as the Fed was furiously tightening monetary policy in order to tamp down inflation. With the most recent rate pause by the Fed, signs of inflation starting to slowly dissipate can be applying downward pressure to yields. As such, now may be the time to take advantage of high yields while they’re still available.

“Bond prices fell throughout 2022 as the Federal Reserve hiked interest rates to combat high inflation, but with an end to rate increases potentially in sight, investors may be able to take advantage of attractive yields in short-term bonds,” noted Bankrate. One of the ETFs referenced to take advantage of yields is the Vanguard Short-Term Bond Index Fund ETF Shares (BSV).

BSV seeks to track the performance of the Bloomberg U.S. 1-5 Year Government/Credit Float Adjusted Index. This index 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. As of December 7, the 30-day SEC yield for BSV is 4.94% with an average duration of 2.6 years.

VCIT’s Focus on Corporate Bonds

Fixed income investors who want to obtain more yield can step further out onto the yield curve. As such, intermediate debt is an option using the Vanguard Interim-Term Corporate Bond ETF (VCIT), which has an average duration of 6.1 years (as of October 31) and a 30-day SEC yield (as of December 8) of 5.59%.

VCIT continues the focus on corporate bonds, providing fixed income investors with more yield albeit more rate risk given its longer duration. As mentioned, VCIT presents a viable option for investors who still want to obtain higher yields that short-duration bonds can’t offer.

The fund seeks to track the performance of a market-weighted corporate bond index with an intermediate-term dollar-weighted average maturity. It employs an indexing investment approach designed to track the performance of the Bloomberg U.S. 5-10 Year Corporate Bond Index, which includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities between five and 10 years.

For more news, information, and strategy, visit the Fixed Income Channel.