A data-dependent Federal Reserve is keen to hold interest rates until it gets additional confirmation inflation is cooling. This could keep the window open for prospective bonds investors seeking value opportunities.
With much optimism heading into 2024, capital markets were expecting rate cuts, but they may be taking longer than anticipated. Given their inverse relationship, bond prices are feeling the downward pressure applied by rising yields as data continues to reveal a hot economy.
“Treasuries came under renewed pressure on speculation that optimism regarding disinflation may have gone too far. In another sign that the world’s largest economy remains on solid footing, the Institute for Supply Management’s services gauge hit a four-month high while prices picked up,” Bloomberg reported. “The news jolted trading on a day when investors were already digesting cautious views from some Fed speakers including Jerome Powell.”
Additionally, jobs-related data confirms the economy continues to hum along, giving the Fed pause on whether they can start cutting rates. Fixed income investors may want to take advantage of yields now before disinflation occurs and subsequently, the Fed starts to trim rates.
“The US economy is testing bond traders’ faith that the Federal Reserve will deliver a series of interest-rate cuts this year,” reported Financial Advisor. “The unexpected surge in hiring in January showed there’s little pressure on the central bank to start easing monetary policy just yet, giving it time to see if inflation is headed sustainably toward its 2% target.”
2 Options to Ponder
Bond prices ticking lower could serve as an ideal entry point for long- or short-term investors. That said, for generalized exposure, consider the Vanguard Total Bond Market Index Fund ETF Shares (BND ), which seeks to track the performance of the Bloomberg U.S. Aggregate Float Adjusted Index.
That 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 one year.
For additional yield, fixed income investors can take on more credit risk via U.S. corporate bonds. If that’s an option, investors can consider the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH ), which seeks to track the performance of a market-weighted corporate bond index with a short-term dollar-weighted average maturity.
The fund employs an indexing investment approach designed to track the performance of the Bloomberg U.S. 1-5 Year Corporate Bond Index. This index includes U.S.-dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities between one and five years.
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