A softening labor market could be what the Federal Reserve needs to finally cut interest rates. In turn, that could push Treasury ETFs higher.
The data-dependent Fed kept rates unchanged most recently, citing that it needs further confirmation that the economy is cooling. Slower job growth during April could be an early sign that the economy is cooling.
Furthermore, the Federal Open Market Committee elected to reduce its bond holdings. That could be a further sign that looser monetary policy is to come. Of course, the 2% target inflation rate remains a key metric for the Fed before reducing rates.
“The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent,” the Fed noted in a statement.
The bond market is thus far reacting positively after the higher-for-longer interest rates narrative shot yields higher the past month. Hope for a rate cut by the end of the year was revived, pushing bond prices higher.
“The world’s biggest bond market is back in celebration mode after its worst month in more than a year,” Bloomberg reported.
Investors looking to get Treasury exposure in a further bond rally, but also want to mitigate rate risk, can look to ETFs like the Vanguard Short-Term Treasury ETF (VGSH). The fund offers ideal exposure to short-term Treasury notes, focusing on maturity dates that fall within one to three years.
An Intermediate and Long-Term Option
Alternatively, a short-term option is the Vanguard Intermediate-Term Treasury Index Fund ETF Shares (VGIT), and long-term fund for higher yield is the Vanguard Long-Term Treasury Index Fund ETF Shares (VGLT).
VGIT seeks to track the performance of a market-weighted Treasury index with an intermediate-term dollar-weighted average maturity. The fund employs an indexing investment approach designed 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.
VGLT seeks to track the performance of a market-weighted Treasury index with a long-term dollar-weighted average maturity. The fund employs an indexing investment approach designed to track the performance of the Bloomberg U.S. Long Treasury Bond Index, which includes fixed income securities issued by the U.S. Treasury (excluding inflation-protected bonds) with maturities greater than 10 years.
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