Surging Yields May Spell Opportunity for Active Bond Funds

Surging Treasury yields continue to place rate cuts on the back burner, leading market experts to believe they may not happen until the end of the year. In the meantime, the current macroenvironment could spell opportunity for active bond funds.

The first quarter saw active bond funds experience increased flows, making it the highest in almost three years.

“About $90 billion flowed into active bond funds in the first quarter, the most for any three-month period since mid-2021,” a Bloomberg report said. It noted that with yields at their highest in almost 20 years, it’s an opportunity for investors to buy into bonds before rate cuts push yields down and subsequently, bond prices higher.

Additionally, fund managers can lock in current yields now before said rate cuts take place. It’s a welcome change, especially for bond funds that need to offload holdings carrying low yields.

“It’s also a chance for active managers to rebuild their portfolios, which had been starved by years of near-zero interest rates,” the report added.

The two-year Treasury note recently touched the 5% yield mark, but the capital markets are hoping it reached a ceiling. It could be a sign yields may be coming down, and subsequently, bond prices rising. Getting exposure to an active fund will help investors maintain flexibility when the bond market environment starts to change.

2-Year Treasury Chart

2 Active Bond Fund Options From Vanguard

With their more competitive expense ratios versus their passive counterparts, it’s an ideal time to consider using the flexibility of active funds. Vanguard has a pair of funds worth considering.

For broad-based exposure, consider the Vanguard Core Bond ETF (VCRB). The fund offers investors diversified exposure predominantly to the U.S. investment-grade bond market. That doesn’t mean sticking strictly within the safe confines of U.S. Treasuries. VCRB extends its exposure to other fixed income assets for diversification, including mortgage-backed securities and corporate securities. Again, with the active exposure that the ETF offers, investors are able to harness the portfolio management capabilities of the Vanguard Fixed Income Group with only a 0.10% expense ratio.

If investors want to turn up the risk dial to extract more yield and remain in an active fund, it doesn’t have to be expensive. With its 0.20% expense ratio, consider the Vanguard Core-Plus Bond ETF (VPLS). The fund offers investment-grade exposure similar to VCRB, but adds selective exposure to riskier credit profiles such as emerging market debt. That risk, however, is tempered by the fund’s active management.

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