Consider Short-Term Treasuries While Yields Are High and Risk Is Low

While investors have been pumping money into investment-grade corporate fixed income, some bond managers are concerned that they aren’t being adequately compensated for the risks associated with such bonds when a recession may be on the horizon. At Morningstar, Sandy Ward wrote that while corporate bonds are seeing strong yields, a potential recession could lead the asset class to suffer downgrades or even defaults. So, investors may be better off targeting short-term Treasuries.

Short-dated U.S. government bonds are currently delivering yields that are competitive with those of IG fixed income. For example, the six-month U.S. Treasury note now yields more than 5.10%, while one-year Treasuries are yielding more than 5.0%. Two-year U.S. Treasuries yield close to 4.9%, while the three- and five-year notes are at 4.6% and 4.3%, respectively. And while the payouts for Treasuries are slightly lower than those of IG corporate bonds, so is the inherent risk.

“If you’re concerned about the possibility of recession, these current valuations in investment-grade credits aren’t very appealing,” said Alfonzo Bruno, associate portfolio manager for outcome-based strategies at Morningstar Investment Management. “I would rather hang out in safer fixed income where I can still get paid a decent yield.”

For investors nervous about the risks associated with IG corporate bonds but still want attractive yields, Vanguard offers short- and intermediate-term U.S. government bond funds in the form of the Vanguard Short-Term Treasury ETF (VGSH) and the Vanguard Intermediate-Term Treasury ETF (VGIT).

VGSH seeks to provide current income with modest price fluctuation, invests primarily in high-quality (investment-grade) U.S. Treasury bonds, and maintains a dollar-weighted average maturity of one to three years.

VGIT, meanwhile, 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, which includes fixed income securities issued by the U.S. Treasury (not including inflation-protected bonds) with maturities between three and 10 years.

Both ETFs carry an expense ratio of just four basis points.

Speaking at Exchange: An ETF Experience, Vanguard CEO Tim Buckley said that the asset manager’s goal is “to make sure we’re producing the top-performing funds and ETFs out there.”

“We’ll wrap it with low-cost, scalable advice and deliver them on a world-class, digitally enabled platform,” he added. “And if you do that well and you can keep improving it, you’ll create value into the future.”

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