Although inflation went down in March, it didn’t drop as much as Wall Street had expected, which suggests the Federal Reserve still has a ways to go in its fight to curb stubbornly high consumer prices.
The personal consumption expenditures index excluding food and energy increased by 0.3% in March. Meanwhile, core PCE increased by 4.6%. While the monthly rise was in line with Dow Jones’ estimate, the core PCE figure is still higher than the 4.5% economists forecast. And of course, it’s still well above the Fed’s target of 2%.
The Fed is expected to raise interest rates by another 25 basis points in May. With the Fed’s last rate hike in March, the U.S. central bank raised the target range for the federal funds rate to 4.75% and 5%.
Fixed income has an inverse relationship with interest rates. When rates rise, bond prices typically fall, because new bonds will soon be coming to the market with higher interest rate payments. So, to reflect the higher overall rates, the price of bonds that are already in the market will drop to make their lower interest rate payments more appealing to investors.
Since interest rates are high – and expected to get higher – it may not be a bad idea to add some high-quality Treasury ETFs to investors’ portfolios. Vanguard currently has a suite of 21 fixed income ETFs, including Treasury ETFs of varying durations such as the Vanguard Short-Term Treasury ETF (VGSH ), the Vanguard Intermediate-Term Treasury ETF (VGIT ), and the Vanguard Long-Term Treasury Index Fund ETF Shares (VGLT ).
VGSH seeks to provide current income with modest price fluctuation, invests primarily in high-quality (investment-grade) U.S. Treasury bonds, and maintains a dollar-weighted average maturity of one to three years.
VGIT meanwhile, seeks to track the performance of the Bloomberg U.S. Treasury 3-10 Year Bond Index, which includes fixed income securities issued by the U.S. Treasury (not including inflation-protected bonds) with maturities between three and 10 years.
For investors comfortable with a little more duration (and more risk), VGLT seeks to track the performance of the Bloomberg U.S. Long Treasury Bond Index, which includes fixed income securities issued by the U.S. Treasury (also not including inflation-protected bonds) with maturities greater than 10 years.
All three ETFs have an expense ratio of four bps.
For more news, information, and analysis, visit the Fixed Income Channel.