The U.S. Federal Reserve, according to its latest minutes, appears to be looking at more rate hikes. It’s what the capital markets expected, which could be why bonds haven’t continued to sell off as rapidly as they have been for much of 2022.
“Most participants judged that 50 basis point increases in the target range would likely be appropriate at the next couple of meetings,” the minutes said. In addition, Federal Open Market Committee members indicated that “a restrictive stance of policy may well become appropriate depending on the evolving economic outlook and the risks to the outlook.”
Bonds, for the most part, have been following stocks downward for much of 2022 amid inflation fears. Whether the worst is over or not is anybody’s guess, but the stage could be set for value-buying in a distressed bond market.
“It’s a little soon to know how much deeper that hole is going to get,” wrote Eric Jacobson in Morningstar. “There are too many shifting sands in the global economy right now. We’re seeing a nascent trend, though, of bond managers opining that some previously rich sectors are beginning to look attractive again, even though their valuations relative to Treasuries haven’t necessarily moved that much.”
Padding a Portfolio With Bonds
One of the key movers for bonds as an attractive investment will be whether a recession occurs or not. As a safe haven asset, bonds could help pad a portfolio during distressed times, such as a recession.
It remains to be seen whether or not the Fed can do enough to stave off a recession with their tightening. Too much could upend growth with wage inflation and business revenue not being able to keep up with inflation or rising interest rates.
“Monitoring how much recession risk is really there, and whether the Fed is evaluating that correctly, will be key to a number of asset allocation decisions in the coming months,” said Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International.
Bond Exposure in 1 Fund
Rather than hold several bond positions, exchange traded funds (ETF) can do all of that in one position. One ETF to consider is the Vanguard Total Bond Market Index Fund ETF Shares (BND ).
BND presents bond investors with an all-encompassing, aggregate solution to getting U.S. bond exposure. It’s an ideal solution for investors seeking to complement their equities exposure.
BND seeks the performance of Bloomberg Barclays U.S. Aggregate Float Adjusted Index. The Bloomberg Barclays U.S. Aggregate Float Adjusted Index 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 1 year.
For more news, information, and strategy, visit the Fixed Income Channel.
