This year will most likely be remembered as one of the worst periods for fixed income. But markets are only anticipating another 1% in rate hikes from the Federal Reserve through mid-2023, which could offer opportunities for long-term bond investors.
Fixed income assets are more fairly priced than they have been in over a decade. While the S&P 500 dividend yield is at 1.7%, two-year Treasuries have yielded 4.5% since mid-November.
So, with Treasury yields as high as they are, there is less of a need to extend out across the risk spectrum. This is especially true now that the U.S. is expected to enter a recession in the coming months. Because of this, Lisa Hornby, head of U.S. multi-sector fixed income at Schroders, argued that short-term Treasuries can offer significant value to investors.
“The good news is that higher-quality, liquid fixed income now offers the best absolute and relative value it has in many years,” Hornby wrote. “Importantly, investors do not need to extend down the credit spectrum or out along the yield curve to earn attractive yields.”
The Vanguard Short-Term Treasury ETF (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 analysis, visit the Fixed Income Channel.