Aggressive rate hikes by the Federal Reserve added to a steeper yield curve the last few years. But easing monetary policy has seen it flatten as of late. At some point, a steepening yield curve will result, leading to yield opportunities for long-term bond ETFs.
While the Fed has been cutting rates, inflation continues to be relatively high, leading capital markets to speculate whether the central bank continues on the path of cuts or potentially pause. The general sentiment, however, is that the Fed will continue to cut, thereby bringing short-term rates lower.
“It’s unusual for the curve to be as flat as it is and stay here for any length of time,” said Morningstar Investment Management’s chief multi-asset strategist Dominic Pappalardo. “Flat yield curves are generally an inflection point for interest-rate policy changing or economic shifts. So, we think going into 2025, short-term rates will continue to fall based on additional Fed cuts, which should cause steepening of the yield curve.”
For generalized exposure to long-term bonds, investors can take a look at the diversified Vanguard Long-Term Bond ETF (BLV ). It seeks to track the performance of the Bloomberg U.S. Long Government/Credit Float Adjusted Index. It includes all medium and larger issues of U.S. government, investment-grade corporate, and investment-grade international dollar-denominated bonds with maturities of greater than 10 years and are publicly issued.
Treasury and Corporate Options
Additionally, fixed income investors can tailor their exposure to specific long-term debt such as safe haven U.S. Treasuries, or get more yield with corporate bonds. For getting specific exposure long-term U.S. Treasuries, consider using the Vanguard Long-Term Treasury ETF (VGLT ). It tracks the performance of a market-weighted Treasury index with a long-term dollar-weighted average maturity. That index includes fixed income securities issued by the U.S. Treasury (not including inflation-protected bonds) with maturities greater than 10 years.
Investors who don’t mind the additional credit risk to extract more yield can opt for corporate bonds via the Vanguard Long-Term Corporate Bond ETF (VCLT ). The ETF tracks the performance of the Bloomberg U.S. 10+ Year Corporate Bond Index. It includes U.S.-dollar-denominated, investment-grade, fixed-rate, taxable securities issued by industrial, utility, and financial companies, with maturities greater than 10 years.
All three funds feature a low expense ratio of just 0.04%. BLV, VGLT, and VCLT can serve as stand-alone products within an ETF portfolio. For strategic exposure, investors can use them as part of a bond laddering option, mixing them with short-term and/or intermediate bond ETF products from Vanguard.
For more news, information, and analysis, visit the Fixed Income Channel.
