With a forthcoming election paired with the expectation of rate cuts, the bond market could see volatility in the second half of 2024. That said, investors may want to opt for a middle-ground solution for yield and rate risk with intermediate-term bond funds.
Short-term bond funds have been the default play the last few years amid rising interest rates. But that strategy could be changing as rate cut expectations increase.
“Once the Federal Reserve begins to cut rates, yields on short-term investments should begin to fall, and investors may be faced with lower yields when their maturing bonds come due,” noted Collin Martin, fixed income strategist at Charles Schwab. “Intermediate and long-term Treasury yields are still near their highest levels in 15 years, so we’d rather lock in those high yields with certainty rather than risk reinvesting at lower yields once the Fed does begin to cut rates.”
While long-term bonds can offer greater yield, intermediate bonds can walk the line between mitigating rate risk and attaining yield. Given this, investors may want to consider a fund like the Vanguard Intermediate-Term Bond ETF (BIV ).
According to its fund description, BIV 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 that intermediate range of five to 10 years.
BIV can give investors broad and diversified exposure to intermediate bonds. But given Vanguard’s suite of bond ETFs, they can also tailor their exposure to certain corners of the bond market such as Treasuries and corporate bonds while still maintaining exposure to intermediate debt.
2 More Intermediate-Term Options
Investors who want to stay within the safe confines of U.S. government debt will want to consider the Vanguard Intermediate-Term Treasury ETF (VGIT ). The fund focuses on Treasury notes that once again fall within that five- to 10-year maturity-date window.
Corporate bonds have presented attractive options in recent times for risk and even credit quality. Therefore, consider exposure to intermediate corporate debt with the +Vanguard Intermediate-Term Corporate Bond ETF+ (VCIT ). The fund seeks to track the performance of a market-weighted corporate bond index with an intermediate-term dollar-weighted average maturity. Intermediate exposure means that, like BIV, VCIT primarily focuses on high-quality corporate bonds with maturity dates that fall between five to 10 years.
All three of the aforementioned funds feature a low 0.04% expense ratio.
For more news, information, and analysis, visit the Fixed Income Channel.
