With the potential of more rate cuts to look forward to in 2026, fixed income investors may question how they could attain additional yield in the new year. A Morningstar 2026 Global Outlook Report noted one particular corner of the bond market that could fill the yield void: intermediate bonds.
Fixed Income Advantages of Intermediate Bonds
Situated between short-term bonds and long-term bonds, intermediate bonds could offer the median between tempering rate risk while stepping further out onto the yield curve. In a time when the U.S. Federal Reserve is expected to ease monetary policy, intermediate bonds could be exactly what a fixed income investor needs in the changing economic landscape.
“Intermediate-dated bonds—those maturing in five to 10 years—look like the sweet spot,” the report said. “They offer yields comparable with cash rates, benefit from capital appreciation as they “roll down the yield curve” toward maturity, and stand to gain further if central banks begin cutting rates.”
Those looking for intermediate bond exposure via a broad-based fund should consider the Vanguard Intermediate-Term Bond ETF (BIV ). The fund 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.
Corporate Bonds and Treasuries
Improving fundamentals have been the highlight of corporate bonds lately, giving investors more confidence in their credit quality. With that, they may not mind accepting more credit risk in order to attain higher yields. If investors fall into this camp, they may want to give the Vanguard Intermediate-Term Corporate Bond ETF (VCIT ) a closer look. VCIT’s focus is on high-quality corporate bonds with maturity dates that fall between five to 10 years.
The Morningstar report did not the tightening credit spreads between corporate bonds and Treasuries. It’s a factor for fixed income investors to take into account when pondering corporate bond exposure.
“US investment-grade bonds, on average, have offered an extra 132 basis points of yield over US Treasuries while maintaining low default rates,” the report said. “Today, however, that spread sits near historical lows at just over 70 basis points, even as company fundamentals such as interest coverage and free cash flow/debt have deteriorated.”
That said, investors who want to maintain a low risk profile by staying in safe haven Treasuries, but also want the yield potential of intermediate bonds can opt for the Vanguard Intermediate-Term Treasury ETF (VGIT ). The fund invests Treasury notes that fall within that five- to 10-year maturity-date window.
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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