Intermediate-Term Bonds Shouldn’t Be Ignored | ETF Trends

From late August through the end of October, 10-year Treasury yields spiked by 0.80%, stoking concerns about a run to 5% while dragging yields higher across the duration spectrum. Intermediate-term bonds and exchange traded funds such as the Vanguard Intermediate-Term Treasury ETF (VGIT) weren’t immune to that calamity.

As a result, the $23.3 billion VGIT sported a 30-day SEC yield of 4.75% as of Nov. 6. That’s unusually high for an intermediate bond fund focusing on U.S. government debt.

VGIT’s 109 holdings sport an average duration of 5.1 years. Importantly, in the eyes of some market observers, yields on intermediate-term bonds imply escape velocity — a scenario in which the yields are high enough to offset losses incurred by future rate hikes.

Short-Term Bonds Looking Attractive

While registered investment advisors and investors have been flocking to short- and ultra-short-duration bond ETFs this year, VGIT merits consideration as 2024 beckons on the basis that the worst may be over for bonds in the middle.

“The good news is that it means that even more segments of the yield curve have reached escape velocity. Short-term bonds look even more attractive now than they did just two months ago,” noted Morningstar analyst Madeline Hume. “A one-to-three-year bond fund could theoretically shoulder a 2.7% rise in interest rates in a given year and still produce a positive return for that year. Now, even some intermediate-term government-bond funds pay enough in income to offset up to a 1% rise in interest rates.”

Another reason to consider VGIT is the inverted yield curve. Worse yet, the long end of the curve is moving while the opposite is holding steady. That’s not a scenario that fosters confidence for a near-term rebound in long-duration debt.

“That’s not great news for the investors who flocked to long-term government-bond funds over the past year or so, but it also means that long-term bonds are inching closer to escape velocity,” added Hume. “Duration is still a heavy hammer, greater than these funds’ average yield to maturity. But with 10-year bonds now yielding more than 5%, the gap between the two is the narrowest it has been in almost 15 years.”

Bottom line: VGIT offers the dual benefit of not being as sensitive to changes in interest rates as are long-duration equivalents while offering bond investors higher levels of income than short duration fare. These days, those are attractive traits.

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