The recent weakness in bonds is opening up a pathway for investment capital pouring in from institutional investors. The fall in bond prices in 2022 is giving institutional investors an opportunity to locate value amid a downtrodden bond market.
Rising inflation and U.S. Federal Reserve tightening are providing a perfect storm for weakness in bond prices. As such, rising yields in the short term have been inverting yield curves, sounding the alarm on a potential recession.
As such, bond-focused exchange traded funds (ETFs) have seen better days.
“Exchange traded funds that track bond markets have endured a torrid time this year as galloping inflation has forced central banks to raise interest rates aggressively, in an effort to restore price stability,” a Financial Times article reported. “Investors have been warned to expect more increases in interest rates in the U.S., U.K., and EU as increased volatility in global energy and food prices — resulting from Russia’s war in Ukraine — creates greater uncertainty over the future path for inflation.”
However, chaos creates opportunity. Large institutional investors could be seeing this as an opportunity to scoop up bonds at value-oriented prices.
“But this repricing has been accompanied by shifts in positioning by large institutional investors. Many are abandoning their earlier caution and are now more willing to allocate more funds to the asset class,” the FT article added.
“Bonds are back,” says Vincent Mortier, group chief investment officer at Amundi. “After the great repricing in the first half of the year, and as we move to an environment with a higher risk of recession, government bonds are worth looking at as yields are now more appealing.”
Get Core Bond Exposure
To get bond exposure amid turbulent times, there are a plethora of options available from Treasury bonds to investment-grade corporate options. However, for a more all-inclusive approach to getting core exposure, consider the Vanguard Total Bond Market Index Fund ETF Shares (BND).
BND seeks the performance of the Bloomberg 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 one year.
Bond investors can use BND as a traditional hedging component when the equities market goes awry, should a recession hit. Short-term traders can also use the ETF given its dynamic ability to be bought and sold quickly in the open market.
For more news, information, and strategy, visit the Fixed Income Channel.