The equities markets appear to be sloughing off fears of inflation as prospective rate increases don’t seem to be fazing investors. As such, it’s been risk-on, which has been pushing bond prices down.
“The bond market is responding to expectations of tighter monetary policy, but equity markets are saying if Powell is confident about the growth outlook then risk assets will do well,” said Seema Shah, global investment strategist at Principal Global Investors.
“Equity markets responding in this way is a bit surprising,” Shah added. “One of these views is going to give at some point.”
Still, the prospect of more rate hikes could sway how fixed income investors tailor their exposure. Whether the Fed is more hawkish or not, mitigating rate risk is still something to be wary of in the current market environment.
“This is a Fed that is talking very hawkish and getting the market to do their dirty work for them,” said Andy Brenner, head of international fixed income at NatAlliance Securities. “I do not think that this is an aggressive Fed.”
One way to mitigate risk is to limit exposure to potential increases irrespective of how hawkish the Fed will or will not be. This can be done by shortening duration, but fixed income investors will also want to address yield.
Mitigate Rate Risk and Get More Yield
Corporate bonds can give investors more yield if they’re willing to take on the higher credit risk compared to safer haven government bonds. One fund to consider is the Vanguard Short-Term Corporate Bond Index Fund ETF Shares (VCSH ).
VCSH 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. Under normal circumstances, at least 80% of the fund’s assets will be invested in bonds included in the index.
For more news, information, and strategy, visit the Fixed Income Channel.