With short-term Treasury yields rising, it’s an opportune time to get short-duration bond exposure. The bonds are an ideal option for fixed income investors looking for the dual benefit of more yield as well as duration risk mitigation amid rising interest rates.
“Until recently, short-term bonds were a yield wasteland: A two-year Treasury note yielded 0.21% a year ago and just 1% in January,” Barron’s noted. “Today, the yield is over 3.8% and could soon touch 4%, thanks in good measure to the Federal Reserve’s aggressive interest-rate-hiking campaign.”
The next question of course is how long can yields keep rising, warranting a need for short-duration exposure? Short-term bonds have been the default play for some time, but fixed income investors might be wondering if it’s too late to jump on the short-duration bandwagon, but that shouldn’t be the case.
“The Fed’s work—trying to cool down the economy and tame persistently high inflation—isn’t close to finishing,” Barron’s added. “Rates are expected to keep rising into early 2023. Typically, that would pressure bond prices, which move inversely to yields.”
2 Options for Short-Term Fixed Income
Vanguard has a pair of options to consider when it comes to mitigating rate risk via short-term bond exposure. Investors who want to stay with safe haven Treasury notes can consider the Vanguard Short-Term Treasury ETF (VGSH).
With short duration in focus, VGSH is a prime option to consider. This ETF offers exposure to short-term government bonds, focusing on Treasury bonds that mature in one to three years.
It’s 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.
- Seeks to provide current income with modest price fluctuation.
- Invests primarily in high-quality (investment-grade) U.S. Treasury bonds.
- Maintains a dollar-weighted average maturity of one to three years.
For more diversity beyond Treasury notes, investors can also opt for the Vanguard Short-Term Bond Index Fund ETF Shares (BSV). With more varied holdings, BSV offers added diversification for a bond portfolio while still maintaining a short-duration profile.
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.
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.