Recession Risk Still in Play for Bond Bulls

Inflation is continues its stay in the current macroeconomic environment. As such, the threat of a recession still looms, which could be a boon for bullish bond investors.

The higher-for-longer interest rate narrative could feed into ongoing risks of a recession as economic growth is stifled. This is due to increased borrowing costs. In the meantime, yields are climbing, which is a plus for fixed income seekers.

“A mix of soaring yields and recession risk is setting up investors for an era of ‘extremely attractive’ fixed-income returns, according to Pacific Investment Management Co,” reported Bloomberg. “The outlook is particularly bright for high-quality bonds over the next six to 12 months as inflation cools and growth takes a hit from the delayed effects of monetary policy in major economies.”

While rising yields won’t do any favors for bullish bond investors, an aforementioned potential of a recession could certainly spur a flight to safe haven assets like bonds. Given that scenario, bond prices are in an area of value for investors who are looking to take advantage of the depressed values and pad their portfolios with bonds in case a recession does hit.

“We’re probably going to go into a recession sometime in the first quarter of next year, probably because the bond market, simply through supply and demand, is going to deliver more rate hikes because we don’t have a clearing price yet for long-term debt,” said hedge fund billionaire Paul Tudor Jones. “And so, those rate hikes are probably going to tip us into recession.”

2 Options for Broad Bond Exposure

Vanguard offers a pair of exchange traded fund (ETF) options for investors looking for broad fixed income exposure domestically or internationally. For the former, consider U.S. bond exposure via the Vanguard Total Bond Market Index Fund ETF Shares (BND).

Per its baseline fund description, BND presents bond investors with an all-encompassing, aggregate solution to getting U.S. bond exposure. It’s an ideal solution for investors seeking to complement their equities exposure.

Because the effects of inflation aren’t isolated to the United States, fixed income investors can also get international bond exposure. One easy way as opposed to having various international bond holdings is the Vanguard Total International Bond Index Fund ETF Shares (BNDX).

BNDX seeks to track the performance of a benchmark index that measures the investment return of non-U.S. dollar-denominated investment-grade bonds. International bonds can provide a diversification tool for fixed income investors looking to supplement their current core portfolio.

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