As the Federal Reserve continues to wrestle with inflation, high-quality bonds still present investors with a prime option given the economic uncertainty that looms.
It’s been a comeback year for bonds after taking a bearish turn amid rising interest rates in 2022. Talks of a recession continue to amplify, further supporting the case for bonds as investors look to add safe haven assets.
“Fixed income markets began 2023 on much firmer footing than in 2022, a tumultuous year. In spite of the rally in rates during March, we believe high-quality bonds still offer the best opportunities that they have in many years,” noted asset management company Schroders in a blog.
The Fed has been walking a proverbial tightrope when it comes to raising interest rates without upsetting the economy. Nonetheless, it could be high-quality bonds shining throughout the rest of the year, as the prospects of slower growth look inevitable.
“We witnessed encouraging returns in fixed income at the start of the year and we expect this trend to persist as the year progresses,” the Schroders blog added. “Last year’s headwinds are likely to become tailwinds this year as inflation has peaked, growth is slowing and the Federal Reserve (Fed) pauses or even reverses its tightening course. These regime shifts combined with the highest yields in more than a decade create a much more favorable backdrop for fixed income returns.”
2 Options for Bond Exposure
Investors looking to add bond exposure have ETF options from Vanguard to consider. One worth noting is the Total Bond Market ETF (BND).
BND seeks the performance of Bloomberg Barclays U.S. Aggregate Float Adjusted Index, which represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States, including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than 1 year.
To mitigate rate risk, another option is the Vanguard Short-Term Inflation-Protected Securities Index Fund ETF Shares (VTIP). VTIP seeks to track the Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Year Index, which is a market capitalization-weighted index that includes all inflation-protected public obligations issued by the U.S. Treasury with remaining maturities of less than five years.
The manager attempts to replicate the target index by investing all, or substantially all, of its assets in the securities that make up the index, holding each security in approximately the same proportion as its weighting in the index.
For more news, information, and strategy, visit the Fixed Income Channel.