With a steepening yield curve and rate cut expectations looming, the environment for the bond market can be a tricky one to navigate. That said, here are three bond funds from Vanguard to consider.
Investors have been quick to pile into bonds once again this year as the expectation of rate cuts should push prices higher in the future. While the pace and size of rate cuts remain in question, there’s no doubt in exciting time to add bonds into a portfolio.
“This is a fantastic time to revisit bonds again,” said certified financial planner Scott Ward, senior vice president of Compound Planning in Birmingham, Alabama.
Of course, as rate cuts arrive then yields will subsequently fall, but corporate bonds can help fill that passive income void as long as investors are willing to accept more credit risk. On that note, rather than invest in individual corporate bonds, an aggregate approach is available with the Vanguard Total Corporate Bond ETF Shares (VTC ). It seeks to track the performance of the Bloomberg U.S. Corporate Bond Index. That index measures the investment-grade, fixed-rate, taxable corporate bond market. It includes U.S.-dollar-denominated securities publicly issued by industrial, utility, and financial issuers.
“I think we’ll see corporations emerge from this rate hike cycle in pretty good shape,” Ward added.
Munis and Intermediate Bond Options
Another area of the bond market that’s worthy consideration is municipal bonds or more specifically, the Vanguard Tax-Exempt Bond ETF (VTEB ). Munis are an ideal option for fixed income investors who don’t want the added credit risk of corporate bonds, but want to maintain high quality while attaining yield.
VTEB tracks the Standard & Poor’s National AMT-Free Municipal Bond Index, which measures the performance of the investment-grade segment of the U.S. municipal bond market. Overall, this index includes municipal bonds from issuers, primarily state or local governments or agencies whose interests are exempt from U.S. federal income taxes, and the federal alternative minimum tax.
“Municipalities present a couple of excellent qualities for long-term investors,” said Ward, citing yield and high credit quality.
Lastly, as the yield curve steepens, investors can stretch out duration longer for yield and future price appreciation as rate cuts occur. Intermediate term bonds will allow for that while not stretching out too far into long-term territory. Consider the Vanguard Intermediate-Term Bond ETF (BIV ), which tracks the Bloomberg U.S. 5–10 Year Government/Credit Float Adjusted Index. That is a market-weighted bond index that covers investment-grade bonds with a dollar-weighted average maturity of five to 10 years.
For more news, information, and analysis, visit the Fixed Income Channel.
