The current bond market is certainly confounding fixed income investors as yields rocket higher while bond prices plummet. When in doubt, the best option right now could be to stay short and defensive.
“Staying short and defensive is now the better strategy,” a Barron’s article said, referencing the advice of Dan Fuss, the vice chairman of Loomis Sayles. “Until recently, however, that would have meant earning yields barely above zero. But short to intermediate bond yields have risen appreciably, and prices have fallen concomitantly, as the market has priced in the anticipated federal-funds interest-rate hikes by the Federal Reserve.”
Fuss mentioned the balancing act that occurs when yields are rising while bond prices are falling.
“The challenge, Fuss observes, is to limit the bond price losses while the reinvestment rate rises,” the article added further. “That means shortening maturities. Buying relatively short to intermediate bonds whose prices have fallen lets an investor remain defensive in a rising-yield environment, while prices of those discounted bonds eventually move back to par as they approach maturity.”
2 Short and Defensive Options
Investors who want to shorten duration but stay within the confines of government debt can look at the Vanguard Short-Term Treasury ETF (VGSH). This ETF offers exposure to short-term government bonds, focusing on Treasury bonds that mature in one to three years.
It can be an ideal option, given the uncertainty in the current market environment. Bonds can offer investors a safe haven against stock market volatility, while short-term bonds limit the risks of potential rate rises that can rob investors of fixed income opportunities.
For more diversification in the bond market along with adherence to short duration, investors can opt for the Vanguard Short-Term Bond Index Fund ETF Shares (BSV). BSV seeks to track the performance of the Bloomberg U.S. 1–5 Year Government/Credit Float Adjusted Index, which 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.
Highlights of BSV:
- Seeks to track the performance of the Bloomberg 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.
For more news, information, and strategy, visit the Fixed Income Channel.