Investors appear to be taking a Goldilocks-like approach to bonds — not too short and not too long. According to a Reuters report, investors have been opting for intermediate term-bonds funds of the Treasury variety as uncertainty over the U.S. Federal Reserve’s policy looms.
The Fed recently standing pat on interest rates further drives the uncertainty. But the overall expectation is that the central bank will begin cutting rates when economic data confirms that decision. In the meantime, it appears investors are willing to accept more rate risk, but also minimize credit risk by staying in government debt.
“Investors are flocking to U.S. medium-term government bond funds and helping push their assets to record highs, as uncertainty about the Federal Reserve’s policy path prompts them to seek the sweet spot between income and protection,” the report said.
The start of this year has been marked by record issuance in both the public and private sectors. With the notion that rates will eventually fall, issuing bonds now before yields subsequently drop should draw investors. And so far, it has — record issuance has been meet by more demand.
“According to Morningstar Direct data, U.S. medium-term government bond funds, which include Treasuries and debt issued by government-linked agencies, attracted $9.8 billion in the first two months of this year,” the report added. “That compared with just $2.3 billion for long-term government funds and an outflow of $3.5 billion from short-term government bond funds.”
Bonds Options and More From Vanguard
For an all-encompassing option that has over 2,000 bonds for deep diversity, consider using the Vanguard Intermediate-Term Bond ETF (BIV). The fund tracks the Bloomberg U.S. 5–10 Year Government/Credit Float Adjusted Index. That is a market-weighted bond index that covers investment-grade bonds with a dollar-weighted average maturity of five to 10 years.
Investors wanting to attain more yield can opt for using corporate bonds if they’re willing to accept more credit risk. That said, consider using the Vanguard Intermediate-Term Corporate Bond ETF (VCIT). The fund seeks to track the performance of a market-weighted corporate bond index with an intermediate-term dollar-weighted average maturity. Intermediate exposure means that, like BIV, VCIT primarily focuses on high-quality corporate bonds with maturity dates that fall between five to 10 years.
To stay within the safe confines of U.S. government debt, consider the Vanguard Intermediate-Term Treasury ETF (VGIT). The fund focuses on Treasury notes that fall within that five to 10 year maturity-date window.
For more news, information, and analysis, visit the Fixed Income Channel.