The latest consumer price index report suggesting that inflation may be cooling down has all of a sudden made the $24 trillion Treasury market look a little less dangerous. With the Federal Reserve aggressively raising interest rates, pushing Treasury yields to roughly decade-highs, the margin of safety for buying U.S. debt has widened considerably. Plus, higher yields and coupon payments have driven duration risk lower.
“Bonds are getting a bit less risky,” Christian Mueller-Glissmann, head of asset allocation strategy at Goldman Sachs Group, told Bloomberg. “The total volatility of bonds is likely to fall because you don’t have the same amount of duration, and that’s healthy. Net-net, bonds are becoming more investible.”
Mueller-Glissmann shifted from underweight positions in bonds to neutral at the end of September.
But while bonds are seeming less risky, fixed income investors are still preferring shorter-duration funds. As yields continue to inch higher, shortening duration can mitigate interest rate risk. Skittish investors looking to dip their toes into Treasuries may want to consider the Vanguard Short-Term Treasury ETF (VGSH).
VGSH offers exposure to short-term government bonds, focusing on 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.
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. The fund carries an expense ratio of 0.04%.
For more news, information, and strategy, visit the Fixed Income Channel.