Recession fears amid rampant inflation and rising rates are pushing yields higher on bonds. For bullish bond investors, this doesn’t sound like welcome news, but for fixed income investors seeking yield, it’s music to their ears.
However, that doesn’t mean bullish bond investors will be left out in the cold. A forgettable 2022 for the bond market could be giving way to a brighter 2023, especially if the U.S. Federal Reserve can wrangle inflation while tightening monetary policy without hurting economic growth.
“It has taken a historic selloff, but the bond rout may finally be winding down,” wrote Lawrence C. Strauss in Barron’s. “Yields are also looking plump enough to be attractive again.”
“A two-year Treasury now gets you 4.1%, a yield not seen since 2007 until very recently,” Strauss added further, noting a jump in short-term Treasury yields of not just safe haven government debt, but also corporate bonds. “High-quality bonds issued by companies like AT&T (ticker: T) and Bank of America (BAC) yield upward of 5%. Head out a little further on the risk spectrum and you can get 7% in quality preferred stocks with fixed-interest payments.”
2 Short-Term Bond ETF Options
Vanguard has a pair of options to consider when it comes to mitigating rate risk via short-term bond exposure. Investors who want to stay with safe haven Treasury notes can consider the Vanguard Short-Term Treasury ETF (VGSH).
With short duration in focus, VGSH is a prime option to consider. This ETF offers exposure to short-term government bonds, focusing on Treasury bonds that mature in one to three years.
It can be an ideal option, given the uncertainty in the current market environment. 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.
Overall, VGSH:
- Seeks to provide current income with modest price fluctuation.
- Invests primarily in high-quality (investment-grade) U.S. Treasury bonds.
- Maintains a dollar-weighted average maturity of one to three years.
For a short-duration option in corporate bonds to extract even more yield, fixed income investors can opt for the Vanguard Short-Term Corporate Bond ETF (VCSH), which seeks to track the performance of a market-weighted corporate bond index with a short-term dollar-weighted average maturity. The fund employs an indexing investment approach designed to track the performance of the Bloomberg U.S. 1-5 Year Corporate Bond Index.
This index includes U.S. dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities between one and five years. Under normal circumstances, at least 80% of the fund’s assets will be invested in bonds included in the index.
For more news, information, and strategy, visit the Fixed Income Channel.