More hawkish central banks around the globe could be applying downward pressure on bonds. If that’s indeed the case, getting inflation-protected assets is a must in the current market environment.
Inflation may be proving to be more stubborn than initially anticipated. As such, central banks may be more keen to keep rates elevated longer than the capital markets were originally forecasting.
“Government bond markets from Europe to the United States and Australia are in a tailspin as the prospect of higher interest rates sparks a rout in longer-dated bonds, hurting investors seeking higher returns after a lacklustre first half,” Reuters reported, also noting that “German and British two-year borrowing costs touched their highest levels since 2008 this week, U.S. peers hit highs not seen since 2007, and Australia’s bond yields rose to decade highs.”
Sticky and stubborn inflation warrants a countermove, particularly with respect to fixed income investors. As such, consider the Vanguard Short-Term Inflation-Protected Securities Index Fund ETF Shares (VTIP ).
VTIP seeks to track the Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Year Index performance. The index is a market capitalization-weighted index that includes all inflation-protected public obligations issued by the U.S. Treasury with remaining maturities of less than five years.
Short Duration and Inflation Protection
Given the prospect of further rate hikes, getting short duration is imperative to mitigate rate risk. This is exactly what VTIP does with its 24 bond holdings featuring an average duration of 2.5 years (as of May 31).
The fund also features a low expense ratio of 0.04% with a 30-day SEC yield of 2.46%.
Highlights of VTIP per its product website :
- Seeks to track an index that measures the performance of inflation-protected public obligations of the U.S. Treasury that have a remaining maturity of less than five years.
- Designed to generate returns more closely correlated with realized inflation over the near term and offer investors the potential for less volatility of returns relative to a longer-duration TIPS fund.
- Given its shorter duration, the fund can have less real interest rate risk and lower total returns relative to a longer-duration TIPS fund.
- Invests in bonds backed by the full faith and credit of the federal government and whose principals are adjusted semi-annually based on inflation.
- Can provide protection from inflationary surprises or "unexpected inflation.”
For more news, information, and analysis, visit the Fixed Income Channel.
