Consider Intermediate Treasuries If Rate Cuts Aren’t Coming Soon

The Federal Reserve is expected to make interest rate cuts this year. But representatives from the U.S. central bank are sending the message that the cuts won’t be coming soon.

Last week, Fed Governor Christopher Waller said that lowering interest rates this year will need to be “carefully calibrated and not rushed.” And he’s not the only Fed official who has suggested investors shouldn’t expect rates to come down that much or that quickly.

Atlanta Fed President Raphael Bostic argued that the central bank should hold off on cutting rates until the third quarter. And San Francisco Federal Reserve Bank President Mary Daly said it’s “premature” to think rate cuts are just around the corner.

See more: “Vanguard’s Sara Devereux: ‘We’re in a New Era for Fixed Income’

Lowered Expectations, Higher Yields

And investors seem to be getting the message. Bloomberg reported that the market currently expects five quarter-point cuts in 2024, down from expectation on January 12 of six to seven reductions. These lowered expectations have driven up five-year Treasury yields. Yields for five-year U.S. Treasuries rose 22 basis points last week, the most significant increase since the period ending on May 19.

With that in mind, investors may want to consider Treasury ETFs, and in particular, those that hold Treasuries of intermediate duration. The Vanguard Intermediate-Term Treasury ETF (VGIT) targets Treasuries with durations of five to 10 years. VGIT had a 30-day SEC yield of 3.97% as of January 18.

The ETF has been very popular with investors. It brought in more than $7.8 billion in investor capital in 2023. The fund has amassed $165.8 million in inflows this year, and we’re not even done with January. With an expense ratio of just 0.04%, it’s tough to beat that price.

VettaFi’s Vice Chairman Tom Lydon called the firm “the Hoover of the ETF industry,” for the way it’s vacuumed up investor dollars.

“They are just rock solid. They’re just steady,” he said.

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