The U.S. Federal Reserve has a circus-like balancing act to perform with respect to its bond holdings. The Fed must be able to sell off those bond holdings without triggering a recession.
As of now, the Fed’s holdings are comprised of almost $9 trillion in assets, according to a CNBC report. A lot of the assets are still remnants of the 2008 financial crisis with securitized debt and mortgages.
Another significant portion of the assets is accumulated bond holdings during the height of the pandemic in 2020. With the threat of a credit crisis occurring, the Fed stepped in to purchase bonds — a lot of them bond-focused exchange traded funds (ETFs).
Now with the economy back from the pangs of the pandemic, the Fed is ready to unload its holdings. But it can’t sell off at such an intense level that it would spark a recession, especially when rampant inflation is already spurring talks of stagnant growth.
“What’s happened is the balance sheet has become more of a tool of policy,” said Roger Ferguson, former vice chairman of the Federal Reserve Board of Governors. “The Federal Reserve is using its balance sheet to drive better outcomes in history.”
According to the CNBC report, “Analysts believe that the Fed’s choice to raise interest rates in 2022 then quickly reduce the balance sheet could set off a recession as riskier assets are repriced.” That said, bonds can help shore up a portfolio should a recession be on the horizon.
A Total Bond Option
Investors looking to add bonds to their portfolios can have it all with one ETF that encompasses the total bond market in the safe confines of U.S. debt. One option to consider is the Vanguard Total Bond Market Index Fund ETF Shares (BND).
BND seeks the performance of the 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.
For more news, information, and strategy, visit the Fixed Income Channel.