Rising inflation and volatility are making the bond markets a difficult asset class to navigate right now, but there is a solution from Vanguard that can help stymie their effects.
Rising consumer prices are already top priority on the Federal Reserve’s watch list. As such, they’ll start to taper off their economic stimulus measures, which only makes the debt market that much more challenging.
“On the one hand, global inflation, driven in large part by higher food and energy prices, has spiked to levels unseen in a generation,” a New York Times article explained. “Anyone who has recently strolled the aisles of a grocery store or filled up their car’s gas tank has felt the pinch.”
“On the other hand, the Federal Reserve has indicated that it might try to put a damper on inflation by tapering its bond purchases and raising the interest rates under its control,” the article said further. “Those moves could reduce the value of existing bonds.”
Moving in Conjunction With Inflation
One way to combat rising inflation is to hedge against it with an exchange traded fund (ETF) that invests in Treasury inflation-protected securities (TIPS) that move in conjunction with inflation. One such fund is the Vanguard Short-Term Inflation-Protected Securities Index Fund ETF Shares (VTIP).
VTIP seeks to track the Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Year Index performance. The index is a market capitalization-weighted index that includes all inflation-protected public obligations issued by the U.S. Treasury with remaining maturities of less than five years.
The manager attempts to replicate the target index by investing all, or substantially all, of its assets in the securities that make up the index, holding each security in approximately the same proportion as its weighting in the index.
- Seeks to track an index that measures the performance of inflation-protected public obligations of the U.S. Treasury that have a remaining maturity of less than five years.
- Designed to generate returns more closely correlated with realized inflation over the near term and offer investors the potential for less volatility of returns relative to a longer-duration TIPS fund.
- Given its shorter duration, the fund can have less real interest rate risk and lower total returns relative to a longer-duration TIPS fund.
- Invests in bonds backed by the full faith and credit of the federal government and whose principals are adjusted semiannually based on inflation.
- Can provide protection from inflationary surprises or ”unexpected inflation.”
For more news, information, and strategy, visit the Fixed Income Channel.