Inverting yield curves aren’t the only thing suggesting a potential recession amid rising interest rates. A May CNBC Fed Survey notes that a more aggressive Fed could eventually lead to a recession.
“Respondents, who include economists, fund managers and strategists, see the funds rate hitting 2.25% by year end and rising to a terminal rate of 3.08% by August 2023,” CNBC reports. “The terminal rate is 72 basis points higher than the March survey and is hit three months earlier. Rates come down after that, ending 2023 at 2.6%.”
It’s certainly a sign of the times as the capital markets are flooded with worry about an overheating economy. Stocks and bonds have been feeling the downward pressure as the Fed scrambles to raise rates in order to parry the effects of inflation.
“I don’t think markets appreciate that (quantitative tightening) is very aggressive, and this double-barreled tightening will be disruptive,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group. “A lot of rate hikes have, of course, been priced in, but we’ve also not yet priced in the economic impact of the most aggressive monetary tightening cycle in the post-Volcker world.”
A Safety Net Amid a Recession
Despite the weakness in the broad bond market, one of the best ways to pad a portfolio is still by getting broad-based bond exposure. Exchange traded funds (ETFs) focused on aggregate bond exposure can provide the necessary padding.
One such ETF 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 can be an ideal solution for investors seeking to complement their equities exposure.
BND seeks the performance of Bloomberg U.S. Aggregate Float Adjusted Index. The Bloomberg 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 one year.
As mentioned, bond investors can use BND as a traditional hedging component when the equities market goes awry. Short-term traders can also use the ETF given its dynamic ability to be bought and sold quickly in the open market.
For more news, information, and strategy, visit the Fixed Income Channel.