Yields are once again resuming an upward trajectory in benchmark Treasury rates, emphasizing the importance of shortening duration with ETFs such as the Vanguard Short-Term Bond Index Fund ETF Shares (BSV).

The latest uptick in yields comes as rising inflation starts to reinforce itself in the latest producer price data. The Federal Reserve’s plan to taper off bond purchases could also push yields higher.

“The producer price index rose 0.7% in August, above the consensus estimate of 0.6%. The reading marked a slowdown from the 1% gain in wholesale prices for July but the index is now up 8.3% year over year, the largest increase since at least 2010,” a CNBC article stated. “The index tracks the changes in selling prices received by domestic producers for their output and is one measure of inflation, which is another economic indicator being used by the Fed to determine its timeline for any changes to its policy.”

BSV seeks to track the performance of the Bloomberg Barclays U.S. 1–5 Year Government/Credit Float Adjusted Index. This index includes 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.

All of the fund’s investments will be selected through the sampling process, and at least 80% of its assets will be invested in bonds held in the index.

Highlights of BSV:

  • Seeks to track the performance of the Bloomberg Barclays U.S. 1–5 Year Government/Credit Float Adjusted Index, a market-weighted bond index that covers investment-grade bonds with a dollar-weighted average maturity of one to five years.
  • Invests in U.S. government, high-quality (investment-grade) corporate and investment-grade international dollar-denominated bonds.
  • Follows a passively managed, index sampling approach.

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Inflation Concerns Abound

Rising inflation will continue to be a thorn in the side of bond investors. It’s yet another reason for fixed income investors to shorten their duration in the current market environment to help stymie the effects of income erosion as a result of rising inflation.

“Bottom line, these are 1970′s type inflation readings and while the time periods are obviously different in many ways, it confirms again that we have the most intense inflation pressures since then. As the market will focus more on Tuesday’s CPI and the figures today were about as forecasted, bond yields are little changed in response, while higher on the day,” Peter Boockvar, Bleakley Advisory Group chief investment officer, said.

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