Inflation fears continue to spur an exodus from bonds, but as more selling pressure occurs, that only clears the runway for savvy investors looking for bargains.
In the meantime, all eyes in the capital markets continue to focus on the Federal Reserve. More hawkishness could mean ongoing downward pressure applied to the bond markets.
“The Federal Reserve and its moves to quickly raise interest rates to fight surging inflation,” Barron’s notes. “Because of their long maturities and low coupon payments, investment-grade corporate bonds tend to fare poorly in periods of rising interest rates. The Treasury market has lost 5.6% this year, according to ICE Indices, and high-rated corporate bonds have fared worse, posting a 7.7% loss.”
Still, weakness could translate to further strength once the bond markets turn around. Fears of a recession amid inverting yield curves could spark a flight into the safety of bonds.
3 ETFs to Consider for Broad Exposure
To get aggregate exposure to the bond markets, investors can consider the Vanguard Total Bond Market Index Fund ETF Shares (BND). BND presents bond investors with an all-encompassing, aggregate solution to getting U.S. bond exposure. It can be an ideal solution for investors seeking to complement their equities exposure.
For corporate bond exposure, in order to get more yield (albeit with more credit risk), investors can opt for the Vanguard Total Corporate Bond ETF ETF Shares (VTC). The fund seeks to track the performance of a broad, market-weighted corporate bond index.
The fund is a fund of funds, and it employs an indexing investment approach designed to track the performance of the Bloomberg U.S. Corporate Bond Index, which measures the investment-grade, fixed-rate, taxable corporate bond market. The fund comes with a low expense ratio of 0.04%.
Another option for government debt exposure, specifically in Treasury notes, is the Vanguard Intermediate-Term Treasury Index Fund ETF Shares (VGIT). It can be an ideal option for bond investors who want more yield than what a short-duration bond ETF can offer, but not the rate risk that goes with stepping out further into the yield curve.
For the risk-averse, VGIT gives investors exposure to safer debt issues with Treasury notes. Per the fund description, 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. This index includes fixed income securities issued by the U.S. Treasury (not including inflation-protected bonds) with maturities between three and 10 years.
For more news, information, and strategy, visit the Fixed Income Channel.