Strong Economy is Supporting Higher Bond Yields

Stubborn and sticky inflation could keep interest rates elevated for some time, translating into the continuance of higher yields in the bond market. One of the reasons for higher bond yields, as a Markets Insider article pointed out, has been a stronger-than-expected economy.

The U.S. Federal Reserve has been walking a tightrope in trying to hike rates to tame inflation without upending economic growth. Currently, the idea that a recession will hit and a subsequent flight to safe haven assets like bonds is falling by the wayside.

“The continued strength of the U.S. economy, in spite of one of the most aggressive Fed rate hiking campaigns in decades, has caused the bond market to start to price out the immediate risk of recession. Moreover, it is pricing out the immediacy of interest rate cuts as well,” Lawrence Gillum, chief fixed income strategist at LPL Financial, said.

If fixed income investors are keen on locking in yields while they’re still elevated, now may be the time to do so. Bond-focused exchange-traded funds (ETFs) can provide easy access to broad bond exposure domestically and internationally.

2 Bond Options for Exposure

To get exposure to the U.S. bond market, consider the Vanguard Total Bond Market Index Fund ETF Shares (BND). As it’s constructed, BND presents bond investors with an all-encompassing aggregate solution to getting U.S. bond exposure.

BND, with its 30-day SEC yield of 4.54% as of August 15, seeks the performance of the Bloomberg U.S. Aggregate Float Adjusted Index. The index represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States, including government, corporate, and international dollar-denominated bonds and mortgage-backed and asset-backed securities, all with maturities of more than one year.

For a more diversified bond portfolio that includes international debt issues, investors can consider the Vanguard Total International Bond Index Fund ETF Shares (BNDX) with its 30-day SEC yield of 3.31% (also as of August 15). BNDX employs an indexing investment approach designed to track the performance of the Bloomberg Global Aggregate ex-USD Float Adjusted RIC Capped Index (USD-hedged), which provides a broad-based measure of the global, investment-grade, fixed-rate debt markets.

BNDX seeks to track the performance of a benchmark index that measures the investment return of non-U.S. dollar-denominated investment-grade bonds. International bonds can provide a diversification tool for fixed income investors looking to supplement their current core portfolios.

For more news, information, and analysis, visit the Fixed Income Channel.