In a rate-hiking environment the last few years, short-term bonds have been the default exposure option. But as the bond market expects more rate cuts to come after September’s drop of 25 basis points, investors may want to consider intermediate bonds as a way to maximize income.
In the short-term horizon, rate cuts appear imminent if gauging probabilities based on the CME FedWatch. It’s currently forecasting a 90%-plus chance of rate cuts this month, while market strategists see short-term events like a government shutdown accelerating the prospect of further cuts.
“The US government shutdown and associated data delays nudge what we judged was already a firmly odds-on Fed rate cut in October further odds-on,” said Krishna Guha, head of global policy and central bank strategy at Evercore ISI.
With the prospect of rate cuts applying downward pressure on yields, this gives investors an opportunity to reallocate their bond portfolios to get intermediate exposure. These bonds with longer durations can be beneficial in today’s interest rate environment where the Federal Reserve is in the early stages of easing monetary policy. Investors accustomed to the higher yields of the past few years can reach for more income by stepping further out on the yield curve with intermediate exposure.
That said, Vanguard has options to consider for attaining exposure in the belly of the yield curve. First up is the Vanguard Intermediate-Term Bond ETF (BIV ). It tracks the Bloomberg U.S. 5–10 Year Government/Credit Float Adjusted Index, which covers investment-grade bonds with a dollar-weighted average maturity of five to 10 years.
Treasury & Corporate Bond Options
Because of ongoing market uncertainty, investors may want to opt for the safe haven of Treasury notes. The risk-averse can stay within the safe confines of U.S. government debt with the Vanguard Intermediate-Term Treasury ETF (VGIT ). The fund invests Treasury notes that fall within that five- to 10-year maturity-date window.
Those wanting to attain more yield can opt for using corporate bonds as long as they’re open to accepting higher credit risk. That said, consider using 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. VCIT 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 expense ratio of 5 basis points or $5 per every $10,000 invested.
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