With the personal consumption expenditures (PCE) index moving to its lowest level the last few years, the path may finally be open for rate cuts. That said, fixed income investors may want to lock in higher yields in the current rate environment, before the higher-for-longer narrative fades into the background.
Rate hikes may have been pushing bond prices lower, but for yield seekers, it’s been a welcome sight. Short-term term bonds have been the preferred methodology for fixed income allocation amid the Fed’s rate-hiking. But now investors can look to intermediate and long-term bonds if they haven’t already started.
“Short-term bond yields are high currently, but with the Federal Reserve poised to cut interest rates investors may want to consider longer-term bonds or bond funds,” said Collin Martin of Charles Schwab, via an Advisor Perspectives article.
In most conditions, it can be difficult to attain attractive yield and credit quality at the same time. However, the line of demarcation between the two has been somewhat faded, and investors can take advantage of investment-grade debt while still getting relatively high yields.
“High-quality bond investments remain attractive,” Martin added. “With yields on investment-grade-rated bonds still near 15-year highs, we believe investors should continue to consider intermediate- and longer-term bonds to lock in those high yields. By focusing more on short-term bond investments, investors likely will face reinvestment risk once the Federal Reserve begins to cut interest rates, as it is widely expected to do this year.”
Vanguard has a pair of intermediate and long-term exchange-traded fund (ETF) options to ponder.
2 Options for Intermediate, Long-Term
The Vanguard Intermediate-Term Treasury Index Fund ETF Shares (VGIT) seeks to track the performance of the Bloomberg U.S. Treasury 3-10 Year Bond Index. This index includes fixed income securities issued by the U.S. Treasury (not including inflation-protected bonds) with maturities between three and 10 years. VGIT carries a low 0.04% expense ratio and a 30-day SEC yield of just over 4.23% as of February 27.
For additional yield opportunities, fixed income investors may want to look at the Vanguard Long-Term Treasury ETF (VGLT), which tracks the performance of a market-weighted Treasury index with a long-term dollar-weighted average maturity. VGLT employs an indexing investment approach designed to track the performance of the Bloomberg U.S. Long Treasury Bond Index. That index includes fixed income securities issued by the U.S. Treasury (also not including inflation-protected bonds) with maturities greater than 10 years. VGLT has a low 0.04% expense ratio and a 30-day SEC yield of just over 4.50% (also as of February 27).
For more news, information, and analysis, visit the Fixed Income Channel.