Anxiety is starting to fill the bond market. That’s because the capital markets are expecting fewer rate cuts amid a hotter-than-expected economy. One way to ease the anxiety is to consider an actively managed bond portfolio.
Stubborn and sticky inflation could cause the Federal Reserve to rethink its interest rate policy. That’s due to economic data continuing to reveal a robust economy. That notion was substantiated after a December jobs report beat economists’ estimates. It caused yields to rise higher and, subsequently, bond prices to fall.
“This is a hot report,” said Dan North, senior economist for North America at Allianz Trade. “You have to think that [Fed Chair] Jerome Powell is breathing a sigh of relief in the sense that his job just got a little bit easier. Inflation hasn’t been moving anywhere for months, so there’s no incentive to cut rates. Now you get this [jobs report] so you don’t need to cut rates to stimulate the economy.”
In the private sector, higher inflation and interest rates won’t help with debt servicing costs that could eat into corporate profits. Higher debt service costs aren’t isolated to the private sector, as the same issue can be seen in the public sector.
“Bond investors are sending a clarion call to the world’s fiscal authorities to get a grip on their budget trajectories, lest they be subjected to additional wrath,” said Tony Crescenzi, an executive vice president at Pimco.
Core, Actively Managed Exposure
Given the current unease, active bond funds can allow investors to place control of the shaky bond market in the hands of skilled professionals. Such is the case with the Vanguard Core Bond ETF (VCRB ).
With its 0.10% expense ratio, the low-cost fund invests in U.S. Treasury, mortgage-backed, and corporate securities of varying yields and maturities (short-, intermediate-, and long-term issues) for added diversification. Per its fund description, VCRB takes a disciplined, risk-controlled approach when it comes to its bond holdings.
Active management allows VCRB to tap into the knowledge of experienced portfolio managers from the Vanguard Fixed Income Group. They can adjust holdings based on current market conditions, allowing for flexibility in volatile times as opposed to passive funds.
VCRB also focuses on the U.S. investment-grade bond market. In addition to U.S. Treasuries, the fund extends its exposure to other fixed income assets for diversification, including mortgage-backed securities and corporate securities.
For more news, information, and analysis, visit the Fixed Income Channel.
