Go Long On Treasury ETFs as Interest Rates Hit Their Peak

Federal Reserve officials believe that interest rates have hit their peak and will be reduced later this year. That said, Fed policymakers expect rates to remain at high “for some time,” according to minutes from its December meeting.

“Participants viewed the policy rate as likely at or near its peak for this tightening cycle,” the minutes said. They noted, however, “that the actual policy path will depend on how the economy evolves.”

Officials “reaffirmed that it would be appropriate for policy to remain at a restrictive stance for some time until inflation was clearly moving down sustainably.”

“At the meeting, the rate-setting Federal Open Market Committee agreed to hold its benchmark rate steady in a range between 5.25% and 5.5%,” wrote CNBC’s Jeff Cox. “Members indicated they expect three quarter-percentage point cuts by the end of 2024.”

So, with rates likely at their peak, investors may want to lock in high rates before they come down. In particular, longer-duration Treasury ETFs may be the way to go.

See more: “Treasury Yields: A Long-Term Perspective

Going Long on Vanguard Treasury ETFs

Vanguard has a suite of Treasury ETFs that target Treasuries of varying durations. For example, the Vanguard Intermediate-Term Treasury ETF (VGIT) targets Treasuries with durations of five to 10 years. VGIT had a 30-day SEC yield of 4.01% as of January 4.

For investors wanting to go even further out on the curve, the Vanguard Long-Term Treasury ETF (VGLT) maintains an average maturity of 10 to 25 years. VGLT’s 30-day SEC yield was 4.20% as of January 4.

VGIT and VGLT charge just 4 basis points.

Then, there’s the Vanguard Extended Duration Treasury ETF (EDV), which seeks to track the performance of the Bloomberg U.S. Treasury STRIPS 20-30 Year Equal Par Bond Index. Its 30-day SEC yield was 4.24% on January 4.

EDV charges 6 bps.

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