The yield curve is starting to steepen again, giving fixed income investors an opportunity to consider long-term debt again. However, if the risk of stepping too far out into the yield curve is too much to bear, consider using intermediate bond options.
Yield curves have remained inverted the last few years, making short-term debt the primary move to make. As interest rate cuts loom, investors can rethink their strategy.
Capturing Attractive Yields
“Against this backdrop, strategists are encouraging investors to look beyond cash and ultra-short-term bonds to bonds with intermediate maturities—those with terms between three and seven years—in order to capture attractive yields and take advantage of the diversification benefit that fixed income can offer,” Morningstar advised. “They also warn investors against taking too much risk in bonds with very long maturities, since changes in the economic outlook could lead to volatility in those assets.”
As mentioned, investors may not want to step too far out on the yield curve to accept more rate risk to extract more yield. There will always be a case-by-case component when considering an individual’s respective portfolio needs. However, the Morningstar article mentioned that a good place to start is to consider the common approach in the current market environment, which is maturity dates around six years.
“If you don’t have a very good reason not to be around six, you should be around six,” noted Matt Diczok, head of fixed-income strategy for the chief investment office at Merrill and Bank of America Private Bank.
For a broad option for intermediate bonds, consider the +Vanguard Intermediate-Term Bond ETF+ (BIV ). The fund tracks the Bloomberg U.S. 5–10 Year Government/Credit Float Adjusted Index, which covers investment-grade bonds with a dollar-weighted average maturity of five to 10 years. BIV adds exposure to investment-grade U.S. government corporate as well as investment-grade international dollar-denominated bonds, offering diverse exposure. It carries a low expense ratio of 0.04% while offering a 30-day SEC yield of 4.12%, as of Sept. 26.
An Intermediate Muni Bond ETF Option
Municipal bonds are also garnering interest ahead of the presidential election. To obtain intermediate debt exposure in the muni market, consider exposure to the Vanguard Intermediate-Term Tax-Exempt Bond ETF (VTEI ), which tracks the S&P Intermediate Term National AMT-Free Municipal Bond Index and comes with a low expense ratio of 0.08%.
VTEI is ideal for investors looking for yield while also maintaining the credit quality offered by municipal debt. In addition, the added tax benefits of municipal debt cater to investors searching for funds that not only add income, but that can help minimize their tax burden. VTEI can stand alone as an investor’s sole fixed income exposure, or complement Vanguard’s existing suite of fixed income ETFs.
For more news, information, and analysis, visit the Fixed Income Channel.
