The Federal Reserve is expected to raise rates in 2022, making short-duration exposure almost imperative in any fixed income portfolio.
The Fed has already started to taper off its bond purchases amid an improving economy despite the latest roadblock in the form of the Omicron variant. As more medical data shows that the variant may not be as severe in terms of immediate symptoms as the previous Delta variant, the capital markets are de-risking.
As such, bond yields are starting to rise again. Safe haven Treasury notes have been ticking higher across the board, in both the short and longer ends of the yield curve.
As the economy continues the recovery process, Omicron variant or not, interest rates “are expected to rise in 2022, for the second year in a row, which will lower bond prices,” a Think Advisor article notes. “Investors will again have to choose between collecting higher yields from riskier bonds or lower yields from safer ones.”
“Given the broader bond outlook, Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research, favors short-duration fixed income assets such as bank loans, which have adjustable rates that will rise along with increases in short-term rates, and investment-grade corporate debt maturing in five years or less,” the article adds.
2 Short-Duration Options
Vanguard has a pair of short-duration options depending on investors’ needs. When they want to park cash temporarily, there’s the Vanguard Ultra-Short Bond ETF (VUSB). With its low 0.10% expense ratio, VUSB’s investment objective is to seek to provide current income while maintaining limited price volatility.
The fund invests in a diversified portfolio of high-quality and, to a lesser extent, medium-quality fixed income securities. It offers a dollar-weighted average maturity of zero to two years. It’s an ideal option for investors to park cash temporarily that has advantages over the lower-yielding money market funds.
For a broad-based option, there’s the Vanguard Short-Term Bond Index Fund ETF Shares (BSV), which seeks to track the performance of the Bloomberg U.S. 1–5 Year Government/Credit Float Adjusted Index. This index includes a diverse array of bond exposures, including all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds that have maturities between one and five years and are publicly issued.
For more news, information, and strategy, visit the Fixed Income Channel.