Treasury Yields Jump on Fed's 3 Projected Rate Hikes in 2022

Treasury yields jumped when the Federal Reserve confirmed what the capital markets were already expecting, which was rate hikes in 2022.

As stated earlier, the Fed reaffirmed its plan to taper off its bond purchases with a more aggressive tapering starting in January 2022. The Fed already scaled back by $15 billion in November and then followed up by doubling that amount in December.

“Jerome Powell is fighting to make up for lost time following the latest run of bad news on inflation, and today is a reflection of that,” said James McCann, Aberdeen Standard Investments’ deputy chief economist. “The Fed’s really had to demonstrate that they’re willing to move faster and go further to tighten policy more than previously planned as they’ve slipped behind the curve over recent months. It was vital that the Fed acted now to protect its credibility on inflation.”

Benchmark Treasury rates jumped across the board, giving fixed income investors an extra dose of yield. With rates rising in 2022, fixed income investors can catch yield on both ends of the spectrum: long or short—either way, Vanguard has a plethora of options available.

2 Funds On Opposite Sides to Consider

On the short end of the spectrum, there’s the Vanguard Ultra-Short Bond ETF (VUSB). With its low 0.10% expense ratio, VUSB’s investment objective is to seek to provide current income while maintaining limited price volatility.

The fund invests in a diversified portfolio of high-quality and, to a lesser extent, medium-quality fixed income securities. It offers a dollar-weighted average maturity of 0 to 2 years. It’s an ideal option for investors to park cash temporarily versus lower-yielding money market funds.

For higher yield in lieu of accepting more credit risk, a long-term option is the Vanguard Long-Term Treasury Index Fund ETF Shares (VGLT). With its paltry expense ratio of just 0.05%, cost-conscious fixed income investors who want exposure to long-dated Treasury notes can have the fund they’re looking for in VGLT.

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.

This index includes fixed income securities issued by the U.S. Treasury (not including inflation-protected bonds) with maturities greater than 10 years. Under normal circumstances, at least 80% of the fund’s assets will be invested in bonds included in the index.

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