Needless to say, it’s been a roller coaster ride for the bond markets in 2022, but heavy volatility can be a trader’s friend. With bond prices moving up and down (mostly down as yields push higher), it creates an air of excitement for traders who can deftly play the moves of the bond market.
“We are right in the sweet spot of rates really being an interesting market, with clients being excited to trade,” said Paul Hamill, head of global fixed income, currencies, and commodities distribution at Citadel Securities. “Everyone is spending all day talking to clients and talking to each other. It’s been fun.”
Traders certainly have their eyes fixated on what the U.S. Federal Reserve is doing, which should continue to add more volatility to the bond markets. Traders are anticipating another rate hike as the Fed looks to keep inflation under control, but it could be to the detriment of economic growth.
As such, that could create an environment that’s conducive to a recession. This could spur a flight to safety into bonds, but while it’s all speculation, this is just the type of environment where a skilled trader thrives.
2 Options for the Current Bond Market
To get broad bond exposure for diversification, a fund to consider is the Vanguard Total Bond Market Index Fund ETF Shares (BND). BND seeks the performance of Bloomberg U.S. Aggregate Float Adjusted Index, which represents a wide spectrum of public, investment-grade, taxable, fixed income securities in the United States, including government, corporate, and international dollar-denominated bonds, as well as mortgage-backed and asset-backed securities, all with maturities of more than one year.
As mentioned, bond investors can use BND as a traditional hedging component when the equities market goes awry. Short-term traders can also use the ETF given its dynamic ability to be bought and sold quickly in the open market.
With interest rates on the move and yields pushing higher in the short end of the yield curve, another strategy is to opt for short duration. This is where traders can consider the Vanguard Short-Term Bond Index Fund ETF Shares (BSV) for all-inclusive exposure to short-term debt.
BSV seeks to track the performance of the Bloomberg U.S. 1–5 Year Government/Credit Float Adjusted Index. This index 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.
For more news, information, and strategy, visit the Fixed Income Channel.