Getting more yield amid rising inflation is possible without sacrificing credit quality with the Vanguard Long-Term Bond Index Fund ETF Shares (BLV).

The equities markets have been whipsawing with volatility amid inflation fears as everyone tries to guess how aggressive the Fed will be with regard to interest rates. That’s also causing bond investors to fret since rising inflation also translates to rising yields.

“When inflation rises, returns on bonds become negative, because rising yields, led by higher inflation expectations, will reduce their market price,” a MarketWatch report says. “Consider that any 100-basis-point increase in long-term bond yields leads to a 10% fall in the market price—a sharp loss. Owing to higher inflation and inflation expectations, bond yields have risen and the overall return on long bonds reached -5% in 2021.”

“The basic story here is simple. The reopening of the economy after the initial lockdowns brought a surge in demand, which was bolstered by the trillions of dollars in aid that the federal government provided to households and businesses,” a New York Times report explains. “But supply chain bottlenecks, labor shortages and other issues meant that businesses could not fully meet that demand. Strong demand plus limited supply is a recipe for inflation.”

Longer Duration and More Yield in One ETF

With a 30-day SEC yield of almost 3%, BLV outdoes the benchmark 30-year Treasury yield and also adds more diversification to the portfolio mix. BLV adds safer government bonds, but also corporate bonds for that extra dose of yield.

With an average debt duration of 16 years in its holdings, BLV seeks to track the performance of the Bloomberg U.S. Long Government/Credit Float Adjusted Index. This index includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities of greater than 10 years and are publicly issued.

As such, BLV can draw from a variety of options when it comes to bond investments. As mentioned, the common denominator is that the fund sticks to higher duration with debt holdings that exceed a decade.

Product summary per the Vanguard website:

  • Seeks to track the performance of the Bloomberg U.S. Long Government/Credit Float Adjusted Index.
  • Exchange-traded share class.
  • Passively managed using index sampling.
  • Diversified exposure to the long-term, investment-grade U.S. bond market.
  • Provides high current income with high credit quality.

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