Fixed Income Offers Opportunities Not Seen in Over a Decade

With yields on the rise as investors asses how the Federal Reserve will move forward with raising interest rates, fixed income is offering investment opportunities not seen in more than a decade, particularly in investment-grade products.

Yields spiked after the Labor Department posted a hotter-than-expected U.S. jobs report, which showed that the U.S. added 263,000 jobs in November, well above the 200,000 new jobs economists had expected. The unemployment rate was unchanged at 3.7%, while average hourly wages rose 0.6% to $32.82 per hour.

The strong jobs report is likely to keep the Federal Reserve on its path to raise interest rates by 50 basis points at its meeting this month.

For investors looking to include some high-quality fixed income to their portfolios while yields are up, funds like the Vanguard Short-Term Bond ETF (BSV), the Vanguard Total Bond Market ETF (BND), and the Vanguard Short-Term Inflation-Protected Securities ETF (VTIP) may be worth looking into.

BSV seeks to track the performance of the Bloomberg U.S. 1–5 Year Government/Credit Float Adjusted Index, a market-weighted bond index that covers investment-grade bonds with a dollar-weighted average maturity of one to five years. The fund invests in U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds. BSV has an expense ratio of 0.04%.

BND, which carries an expense ratio of 0.03%, seeks the performance of the Bloomberg U.S. Aggregate Float Adjusted Index, which represents a broad spectrum of public, investment-grade, taxable, fixed income securities in the U.S., including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than one year. While it holds securities of all maturity lengths, BND is heavily weighted towards the short end of the curve.

VTIP tracks the Bloomberg U.S. Treasury Inflation-Protected Securities 0-5 Years Index, investing in debt with a remaining maturity of fewer than five years and a mix of short- and medium-term duration, giving some protection against rising interest rates. VTIP also carries an expense ratio of just four basis points.

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